| This study examines the predictability of fraudulent financial tendencies using publically available data. The study includes five financial statement ratios, one market value or size ratio and a quantitative measure of corporate governance. Previous research has analyzed the predictability power of financial ratios, accruals, and size with moderate success. In addition, current research has analyzed the qualitative aspects of corporate governance finding certain conditions or characteristics more prevalent in fraudulent firms than non-fraudulent firms. In addition, current research has quantified the qualitative aspects of corporate governance and determined which structure of corporate governance provided greater market value. But the quantitative corporate governance measure has not been utilized in predicting fraudulent financial reporting tendencies.;This research found the use of corporate governance as a statistically significant predictor of fraudulent financial tendencies. The most current governance measure was created by Brown & Caylor (2006); Gov_Score. This researched combined the six financial ratios with the Gov_Score to determine if the combination of these indexes predicts fraudulent behaviors at better than a fifty fifty chance. The sample was selected based on the availability of the Gov_Score. This limited the sample to public firms data from 2002--2004 and was approximately 2000 firms. The results concluded day sales in receivable, sales growth and Gov_Score are statistically significant in a few of the models and the overall model. The findings contribute to the body of literature by confirming the use of corporate governance as a pre-screening tool or red-flag indicator. |
