Binary governance of financial report fraud

Author: Zhu Guohong
Publisher:
Publish Date: 2004-08-01
Features: Financial reporting fraud is an accounting issue, but it is not entirely an accounting issue; it is underpinned by profound economic conflicts of interest. Based on a review of extensive domestic and international literature, the author confirms the rationale of exploring the causes and governance of financial reporting fraud in Chinese listed companies from both incentive and accounting control perspectives. Subsequently, it is demonstrated at two levels—both theoretical logic and empirical support—that insufficient and misaligned incentives for senior management of listed companies, as well as the dilution and weakening of internal accounting controls, and the lack of effectiveness of external accounting controls, are the two fundamental causes of financial reporting fraud in Chinese listed companies. Therefore, the author proposes, based on international comparisons and a focus on reality, that the governance of financial reporting fraud in Chinese listed companies must adhere to a dual governance strategy that emphasizes the simultaneous and mutually reinforcing optimization of incentives and strengthening of accounting controls. In terms of accounting controls, it is essential to emphasize a systemic accounting control that fosters a healthy interaction between internal and external accounting controls.