The Relationship between Board Diversity, Board Independence and Corporate Fraud

Abstract

This study examines the relationship between board diversity, board independence and corporate fraud. This study employs agency theory to support the hypotheses. This study examines a sample of 42 companies that are listed on Bursa Malaysia, comprising 21 fraudulent companies and 21 non-fraudulent companies during the period from 2013 until 2017; with two firm-year observations which brings to eighty-four firm-year observations altogether. This study uses secondary data that have been obtained from the narrative information of the Corporate Information section of the annual reports of the said sample companies. This study uses binary logistic regression analysis to examine whether there is significant relationship between board diversity and board independence and corporate fraud. The results evidence significant relationship between gender diversity, board experience and board independence and corporate fraud whereby the increase in the number of women directors, a mixed of directors with industrial and accounting/finance experience and independent directors decrease the likelihood of the occurrence of corporate fraud. On the other hand, the results fail to document any relationship between board age and board education and corporate fraud.

Role of Board Gender Diversity in Facilitating or Mitigating Fraud: A Research Review

“…At higher levels of gender diversity, the effect of having more female directors on corporate boards appears to decrease, suggesting that the influence of gender diversity on reducing the chance of financial malfeasance may be due to a shift in board group dynamics. Haron et al (2021) analysed the connection between corporate fraud, board independence, and board diversity. They analysed a representative sample of 42 firms listed on Bursa Malaysia, which between 2013 and 2017 included 21 fraudulent companies and 21 non-fraudulent companies.…”

“…of the factors noticed by the literature under review include, political connections,(Maulidi, 2023); frequent board meetings, a board that is predominately made up of people of Chinese descent, a high percentage of independent directors, and a chairman who doubles as the CEO or Managing Director,(Kamarudin et al, 2018); establishment of specific law enforcement agencies and laws, such as the Anti-Corruption Commission, the Anti-Money Laundering, Anti-Terrorism Financing, and Proceeds of Unlawful Activities, the Penal Code, and the Companies Act, (Mohd Uzir & Saat, 2023); a shift in board group dynamics,(Wahid, 2019); a mix of directors with industrial and accounting/finance experience, and independent directors,(Haron et al, 2021); increase in the board composition, as measured by the percentage of non-executive directors (NEDs) on the board, as well as a drop in board dominance(Ibadin & Ehigie, 2019).…”

“…; frequent board meetings,(Kamarudin et al, 2018); establishment of specific law enforcement agencies and laws, such as the Anti-Corruption Commission, the Anti-Money Laundering, Anti-Terrorism Financing, and Proceeds of Unlawful Activities, the Penal Code, and the Companies Act, (Mohd Uzir & Saat, 2023); a shift in board group dynamics,(Wahid, 2019); a mix of directors with industrial and accounting/finance experience, and independent directors,(Haron et al, 2021); increase in the board composition, as measured by the percentage of non-executive directors (NEDs) on the board, as well as a drop in board dominance (Ibadin & Ehigie, 2019) etc. Moreover, based on the findings in previous research, we observed that gender diversity affected cybersecurity disclosures among corporations but didn't affect the strength or weakness of the internal control.…”