Journal of Management & Governance

, Volume 20, Issue 3, pp 625–653 | Cite as

Corporate governance and accounting irregularities: Canadian evidence

  • Nadia Smaili
  • Réal Labelle


This study examines the extent to which corporate governance acts as an efficient means of protecting investors against accounting irregularities. It is grounded in the literatures on public enforcement of securities laws by market authorities, governance, and fraudulent financial statements. A unique feature of the Canadian tracking and enforcement system for reporting issuers in default is used to refine the definitions of accounting irregularities or fraudulent financial statements used in other studies. We test and find that the governance mechanisms of firms found in default of financial reporting regulations during the first 5 years of existence of the Canadian system are weak compared to a sample of no-default firms. For instance, they have fewer independent and financial expert directors on their boards and audit committees, are more prone to have recently changed auditor and to having their CEO as chair of the board. They also appear to fulfill their financing requirements through private rather than public funds, which is consistent with the fact that default firms are less likely to be in a position to return to the public market to fulfill their needs. This study offers evidence relevant to policy makers and others who are concerned with the potential role of market authorities and governance in protecting investors against accounting irregularities.


Governance Accounting irregularity Financial reporting quality Fraudulent financial statement Restatement Regulation Reporting issuer in default 

JEL Classification

G38 G34 G32 



We appreciate the valuable comments received from Bernard Sinclair-Desgagné, Michel Magnan, Luo He, Zoe-Vonna Palmrose, Stéphane Rousseau, Jean-Marc Suret, and Daniel B. Thornton, as well as those from participants in the EAA Annual Meeting, and workshops at UQAM, Laval University, and Ivey Business School. The authors also gratefully acknowledge financial support from the Society and Culture Research Fund of Quebec (FQRSC) and the Social Sciences and Humanities Research Council of Canada (SSHRC). The usual caveat applies.


  1. Abbott, L., Park, Y., & Parker, S. (2000). The effects of audit committee activity and independence on corporate fraud. Managerial Finance, 26(1), 55–67.CrossRefGoogle Scholar
  2. Abbott, L., Parker, S., & Peters, G. (2004). Audit committee characteristics and restatements. Auditing: A Journal of Practice and Theory, 23(1), 69–87.CrossRefGoogle Scholar
  3. Agrawal, A., & Chadha, S. (2005). Corporate governance and accounting scandals. Journal of Law and Economics, 48(2), 371–390.CrossRefGoogle Scholar
  4. Baber, W., Kang, S., & Liang, L. (2005). Strong boards, management entrenchment and accounting restatement. In Working paper. (
  5. Beasley, M. S. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. The Accounting Review, 71(4), 443–664.Google Scholar
  6. Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Neal, T. L. (2010). Fraudulent financial reporting 19982007: An analysis of US public companies. COSO report.Google Scholar
  7. Bozec, Y. (2008). Ownership concentration, separation of voting rights from cash flow rights, and earnings management: An empirical study in Canada. Canadian Journal of Administrative Sciences 25(1), i–xv.Google Scholar
  8. Brooks, L., & Labelle, R. (2006). Education for investigative and forensic accounting. Canadian Accounting Perspectives, 5(2), 287–306.CrossRefGoogle Scholar
  9. Broshko, E. B., & Li, K. (2006). Playing by the rules: Comparing principles-based and rules-based corporate governance in Canada and the US. Canadian Investment Review, 19, 18–23.Google Scholar
  10. Carcello, J., & Nagy, A. (2004). Audit firm tenure and fraudulent financial reporting. Auditing: A Journal of Practice & Theory, 23(2), 55–69.CrossRefGoogle Scholar
  11. Davidson, R., & Mackinnon, J. (1993). Estimation and inference in econometrics. New York: Oxford University Press.Google Scholar
  12. Dechow, P., Sloan, R., & Sweeney, A. (1996). Causes and consequences of earnings manipulations: An analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research, 13(1), 1–36.CrossRefGoogle Scholar
  13. Dunn, P. (2004). The impact of insider power on fraudulent financial reporting. Journal of Management, 30(3), 397–412.CrossRefGoogle Scholar
  14. Fairchild, R., Crawford, I., & Saqlain, H. (2009). Auditor Tenure, Managerial Fraud, and Report Qualification: Theory and Evidence. Working paper, University of Bath [online].
  15. Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 26(2), 301–326.CrossRefGoogle Scholar
  16. Farber, D. (2005). Restoring trust after fraud: Does corporate governance matter? The Accounting Review, 80(2), 539–561.CrossRefGoogle Scholar
  17. Gerety, M., & Lehn, K. (1997). The causes and consequences of accounting fraud. Managerial and Decision Economics, 18(7/8), 587–599.CrossRefGoogle Scholar
  18. He, L., Labelle, R., Piot, C., & Thornton, D. (2009). Board monitoring, audit quality, and financial reporting quality: An international review of empirical evidence. Journal of Forensic & Investigative Accounting, 1(2), 1–41.Google Scholar
  19. Hennes, K., Leone, A., & Miller, B. (2008). The importance of distinguishing errors from irregularities in restatement research: The case of restatements and CEO/CFO turnover. The Accounting Review, 83(6), 1488–1519.CrossRefGoogle Scholar
  20. Hossain, M., Mitra, S., & Rezaee, Z. (2014). Voluntary disclosure of reasons for auditor changes and the capital market reaction to information disclosure. Research in Accounting Regulation, 26(1), 40–53.CrossRefGoogle Scholar
  21. Jackson, H. E. (2006). Regulatory Intensity in the Regulation of Capital Markets: A Preliminary Comparison of Canadian and U.S. Approaches, Research Study Commissioned by the Task Force to Modernize Securities Legislation in Canada (July 30), 81-130.Google Scholar
  22. Jackson, H. E., & Roe, M. J. (2006). Public Enforcement of Securities Laws: Preliminary Evidence. Working paper (October 23), 33 p.Google Scholar
  23. Jensen, M. C., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency cost, and ownership structure. Journal of Financial Economics, 3, 305–360.CrossRefGoogle Scholar
  24. Kinney, W., & McDaniel, I. (1989). Characteristics of firms correcting previously reported quarterly earnings. Journal of Accounting and Economics, 11(1), 71–93.CrossRefGoogle Scholar
  25. Klein, A. (2002). Audit committees, board of director characteristics and earnings management. Journal of Accounting and Economics, 33, 375–400.CrossRefGoogle Scholar
  26. Knapp, M. C. (1991). Factors that audit committee members use as surrogates for audit quality. Auditing: A Journal of Practice & Theory, 10, 35–52.Google Scholar
  27. La Porta, R., López-De-Silanes, F., & Shleifer, A. (2006). What works in securities laws? Journal of Finance, 61(1), 1–32.CrossRefGoogle Scholar
  28. Marciukaityte, D., Szewczyk, S., Uzun, H., & Varma, R. (2006). Governance and performance changes after accusations of corporate fraud. Financial Analysts Journal, 62(3), 32–40.CrossRefGoogle Scholar
  29. McMullen, D. S. (1996). Audit committees performance: An investigation of the consequences associated with audit committees. Auditing: A Journal of Practice & Theory, 15(1), 87–103.Google Scholar
  30. Mitra, S., Deis, D., & Hossain, M. (2009). Pre and post-SOX association between auditor tenure and earnings management risk. Journal of Forensic & Investigative Accounting, 1(1), 1–43.Google Scholar
  31. Nieschwietz, R., Schultz, J., & Zimbelman, M. (2000). Empirical research on external auditors’ detection of financial statement fraud. Journal of Accounting Literature, 19, 190–246.Google Scholar
  32. Ontario Securities Exchange (2001). Policy 51-601. Reporting issuer defaults.Google Scholar
  33. Ontario Securities Exchange. (2001). Policy 57-603. Defaults by reporting issuers in complying with financial statement filing requirements.Google Scholar
  34. Ontario Securities Exchange. (2005). Multilateral instrument 52-110. Audit committees.Google Scholar
  35. Palmrose, Z. V. (1999). Empirical research in auditor litigation: Considerations and data. American Accounting Association Studies in Accounting Research, 33, 95.Google Scholar
  36. Persons, O. S. (2005). The relation between the new corporate governance rules and the likelihood of financial statement fraud. Review of Accounting and Finance, 4(2), 125–148.CrossRefGoogle Scholar
  37. Piot, C., & Janin, R. (2007). Audit quality and earnings management in France. European Accounting Review, 16(2), 429–454.CrossRefGoogle Scholar
  38. Raghunathan, B., Lewis, B. L., & Evans, J. H. (1994). An empirical investigation of problem audits. Research in Accounting Regulation, 8, 33–58.Google Scholar
  39. Romano, G., & Guerrini, A. (2012). Corporate governance and accounting enforcement actions in Italy. Managerial Auditing Journal, 27(7), 622–638.CrossRefGoogle Scholar
  40. Salterio, S., & Conrod, J. (2009). Corporate governance: Platitudes, principles or best practices. Technical report, CA-Queen’s Centre for Governance, p. 25.
  41. Sennetti, J., & Turner, J. (2001). Post-audit restatement risk and audit firm size. Journal of Forensic Accounting, 2, 67–94.Google Scholar
  42. Smaili, N., Labelle, R., & Stolowy, H. (2009). La publication d’une information financière non conforme à la loi et aux normes: Déterminants et conséquences. Comptabilité, Contrôle, Audit, 15(1), 159–198.CrossRefGoogle Scholar
  43. Stanley, J. D., & DeZoort, F. T. (2007). Audit firm tenure and financial restatements: An analysis of industry specialization and fee effects. Journal of Accounting and Public Policy, 26(2), 131–159.CrossRefGoogle Scholar
  44. Toronto Stock Exchange. (1994). Where were the directors? Report of the Toronto Stock Exchange Committee on Corporate Governance in Canada (Dey report).Google Scholar
  45. Toronto Stock Exchange. (2001). Beyond compliance: Building a governance culture (Saucier report).Google Scholar
  46. Uzun, H., Szewczyk, S. H., & Varma, R. (2004). Board composition and corporate fraud. Financial Analysts Journal (May/June), 33–43.Google Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.University of Quebec in Montreal Business SchoolMontrealCanada
  2. 2.Stephen A. Jarislowsky Chair in Governance, Department of Accounting StudiesHEC MontréalMontrealCanada

Personalised recommendations