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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 1 Fraud & corporate governance


  1. 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 1

  2. 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 2

  3. 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 3

  4. 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 4

  5. Fraud & misconduct Financial misconduct & fraud Reporting & disclosure Misappropriation & abuse Financial statement fraud Audit breaches Fundraising and prospectus Misappropriation Misleading & deceptive Insider trading/ disclosure market manipulation Directors duties breaches (inc insol trading) Financial services breaches 5

  6. 2 types of fraud/misconduct • 236 observations 2004 2005 2006 2007 2008 Misappropriati 25 43 23 15 21 on & Abuse Reporting & 18 34 29 18 10 Disclosure Total 43 77 52 33 31 6

  7. 2 types of fraud/misconduct 90 80 70 ASIC Fraud Cases 60 50 Misappropriation & Abuse 40 Reporting & Disclosure 30 Total 20 10 0 2004 2005 2006 2007 2008 7

  8. Overall • 43% reporting & disclosure • 57% abuse and misappropriation • 81% in the financial sector 8

  9. 8 sub categories 2004 2005 2006 2007 2008 Total Financial Statement 6 12 3 5 2 28 Fundraising/Prospectus 1 4 4 3 0 12 Misleading/Deceptive 11 18 21 10 8 68 Auditor Related 3 3 1 0 0 7 Misappropriation/Financial 6 12 3 4 3 28 Insider Trading/Market Manipulation 1 3 1 2 0 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 9

  10. 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 10

  11. 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 11

  12. 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 12

  13. 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 70.48% involved 13

  14. 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 14

  15. 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 15

  16. Profile Corporate Governance Characteristic Sample Average Board Size (No. Directors) 6.79 Duality of the Role of CEO & 0.25 Chairperson Proportion of Non-Executive Directors on 0.70 the Board 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 0.14 Governance Principles 16

  17. 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%. 17

  18. 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? 18

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