Independent Directors, Ownership Structure And Financial Fraud

With the emergence of capital markets, the company financial fraud, which seriously disrupts capital market order and investor confidence, become more and more intensified. Therefore, the governance of financial fraud begins to receive attention. In 2001, in order to restore investor confidence, improve corporate governance, protect small shareholders, our securities regulatory authorities introduced the independent directors system (IDS). However, contrary to western countries'highly dispersed ownership structure, the majority of China's listed companies restructure from state-owned enterprise, they sharing a high degree of ownership concentration, the phenomenon of insider control is serious. Therefore, can our independent directors play their expected monitoring role? Whether the different ownership structure will affect independent directors'function or not?To test effectiveness of the IDS, this paper does research on relationship between independent directors and fraudulent financial reporting. On the basis of reviewing the domestic and foreign literatures on the relationship between independent director and financial information, theoretical explaining the concept of independent directors and financial fraud, analyzing the two's generation mechanism on Principal-agent Theory, through collecting data of 151 fraudulent A share listed companies from 2003 to 2009, we empirically analyses the effectiveness of the IDS, and its differences under different ownership structure. The results shows that our independent directors don't play a role in financial fraud, even promote the occurrence of financial fraud to some extent; contrary to in the companies of lower ownership concentration, non-state-owned holding companies, lower shareholders balance power, in the companies of higher ownership concentration, state-owned holding companies, higher shareholders balance power, the positive relationship between independent directors and financial fraud is more significant. These results will provide some references for improving IDS and corporate financial fraud governance.