Misappropriation of assets: A test of SAS No. 82 risk factors

Companies may endure negative consequences because of financial fraud such as the misappropriation of assets. Some consequences include costly litigation to external auditors (Bonner et al. (1998)) and negative market reaction (Karpoff and Lott (1993)). Previous studies investigated different risk factors that predicted or were related to financial fraud. Most of the previous literature focused on investigating the misreporting category of financial fraud (Persons (1995); Green and Choi (1997); Bell et al. (1991); Bell and Carcello (2000)). Few studies have examined financial fraud by combining cases of misreporting and misappropriation of assets (Beasley (1996)). Only a few studies have been conducted using a very limited descriptive analysis of the misappropriation of assets (Silvester (1978); Lobbecke et al. (1989); Strawser (1997)).; This study investigates five research questions by examining the relationship between the occurrence of misappropriation of assets by employees including management and the following risk factors: the effectiveness of the audit committee, the structure of the board of directors, CEO turnover, the external auditor's characteristics, and company's asset characteristics. A search of LEXIS-NEXIS Research Software 7.1, Business/Finance News was conducted to identify articles that report misappropriation news to identify publicly held companies suffering misappropriation of assets by employees including management during the period from 1987 to 2000. The study investigated 81 companies experiencing misappropriation and two control samples: 81 random-control companies and 81 match-control companies.; The results extend the previous literature related to financial fraud and corporate governance. The percentage of independent members in audit committees of companies experiencing misappropriation of assets was significantly lower than those companies not experiencing misappropriation of assets in both the random and matched models. However, there were differences in the results between the random and match models, as the tenure of independent members in the audit committee of companies experiencing misappropriation of assets was significantly shorter than the random-control companies only. In addition, some results did not support or were contradictory to results found in the previous misreporting literature. This could be explained because of the differences in the nature of the misappropriation cases versus the cases of misreporting, as well the sample characteristics such as sample size, time period, industry classification, and company size.