Profile of corporate fraud sanctions and regulatory priorities - - PowerPoint PPT Presentation

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Profile of corporate fraud – sanctions and regulatory priorities

Ellie (Larelle) Chapple & David Tan

corresponding author: Larelle Chapple, Tel: +61 2 61256755, Email: Larelle.Chapple@anu.edu.au

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Fraud & corporate governance

• Beasley 1996– link between corporate

governance and financial statement fraud

• Financial statement fraud- evidence of SEC

sanctions, as reported in the Accounting and Auditing Enforcement Releases (AAERs)

– We don‟t have access to the same sort of data – We can‟t observe financial statement fraud as „easily‟ – Rather than look at financial statement fraud, examine the types of misconduct sanctioned

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Purpose of study

• 1. Identify ASIC enforcement priorities

by examining the types of breaches/misconduct enforced

• 2. Use firm specific characteristics to

profile the governance of those sanctioned firms

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Data sources

• Data is hand collected / collated -> subjectivity?
• ASIC‟s publicly available statements on

enforcement

– Media releases – Annual reports

• Decided cases
• Media attention
• Study based on Australian data – BUT would be

very feasible to do this in NZ

– Access to similar sources – Securities Commission

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Fraud & misconduct

Financial misconduct & fraud Reporting & disclosure Misappropriation & abuse Financial statement fraud Fundraising and prospectus Audit breaches Misappropriation Misleading & deceptive disclosure Insider trading/ market manipulation Directors duties breaches (inc insol trading) Financial services breaches

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2 types of fraud/misconduct

• 236 observations

2004 2005 2006 2007 2008 Misappropriati

• n & Abuse

25 43 23 15 21 Reporting & Disclosure 18 34 29 18 10 Total 43 77 52 33 31

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10 20 30 40 50 60 70 80 90 2004 2005 2006 2007 2008

ASIC Fraud Cases

Misappropriation & Abuse Reporting & Disclosure Total

2 types of fraud/misconduct

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Overall

• 43% reporting & disclosure
• 57% abuse and misappropriation
• 81% in the financial sector

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8 sub categories

2004 2005 2006 2007 2008 Total Financial Statement 6 12 3 5 2 28 Fundraising/Prospectus 1 4 4 3 12 Misleading/Deceptive 11 18 21 10 8 68 Auditor Related 3 3 1 7 Misappropriation/Financial 6 12 3 4 3 28 Insider Trading/Market Manipulation 1 3 1 2 7 Director Duties/Insolvent Trading 5 11 10 2 8 36 Financial Services Breaches 10 14 9 7 10 50 Total 43 77 52 33 31 236

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ASIC priorities

• 2003 – “fighting fraud & misconduct”

– Chair - David Knott

• 2004 – new Chair – Jeff Lucy

– reiterates fighting fraud & misconduct – fight insolvent trading, – improve poor disclosure in capital raisings

• 2005 – “patrolling a broad territory”

– Poor disclosure (bad news) – compliance

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ASIC priorities

• 2006 – Conflicts of interests in the financial

services sector & superannuation disclosures

• 2007 – new Chair – Tony D‟Aloisio

– Review of ASIC‟s activities – Continuous disclosure/market manipulation/insider trading

• 2008 – “a year of change”

– Capital market integrity – GFC & disclosure

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Fraud cases

Information collected concerning each fraud case includes:

• Whether firm was listed at the time of the ASIC

investigation

• Whether more than one person was involved in the

alleged fraud

• Whether the CEO was involved in the alleged fraud
• Whether any directors were involved in the alleged fraud
• Whether any top firm executives were involved in the

alleged fraud

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What we found…

Fraud Case Characteristic Percentage of Fraud Cases More than 1 person involved 74.55% CEO was involved 70.54% At least one director involved 71.56% AT least one top executive involved 70.48%

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perpetrators

• It is clear that when more than one

person is involved in a fraud case, it is highly likely that the CEO, directors, and top executives are also involved.

• “Tone at the top”

CEO Director Top Executive More than 1 CEO 1 Director 0.89*** 1 Top Executive 0.89*** 0.77*** 1 More than 1 0.89*** 0.76*** 0.81*** 1

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Governance characteristics

• Economic Sector (2-digit GICS code)
• Whether firm is listed on the ASX
• Number of directors on the board
• Whether there is a duality in the role of the CEO and

chairperson of the board

• The proportion of non-executive directors on the board
• Whether an audit committee is present
• Whether a nomination committee is present
• Whether a remuneration committee is present
• Whether the firm complied with all the non-compulsory

ASX Corporate Governance Principles

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Profile

Corporate Governance Characteristic Sample Average Board Size (No. Directors) 6.79 Duality of the Role of CEO & Chairperson 0.25 Proportion of Non-Executive Directors on the Board 0.70 Presence of an Audit Committee 0.79 Presence of a Remuneration Committee 0.54 Presence of a Nomination Committee 0.36 Comply with ASX Corporate Governance Principles 0.14

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Profile

Overwhelmingly the sanctioned firms were different in governance profile to the standard population of listed Australian firms in a couple of respects:

• 1. The duality of the chair CEO is observed in 25% of

cases – usually this is expected to be in 3% of the entire population of listed firms.

• 2. The presence of an audit committee is negatively

correlated with top management perpetrators, indicating a positive signal for the monitoring role of the audit committee.

• 3. The compliance rate of 14.3% of sanctioned firms -

The ASX monitors compliance every year and reports on compliance – typically the ASX finds compliance to be in the vicinity of 90%.

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What next

• The “profile” is correlation – not causation
• With more listed firms in the sample

(n=29) could try more causation research techniques

• Speculative: ASIC targets weak

governance – top level perpetrators, tone at the top message

• NZ message?