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Corporate governance and accounting irregularities: Canadian evidence

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Abstract

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.

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Notes

  1. By an accounting irregularity, we mean a manipulation of financial data that does not comply with the financial authority’s requirements and may even be fraudulent.

  2. We use interchangeably “financial reporting” or “accounting” irregularity to describe corporate financial reporting practices found by the OSC to be in default of its financial statement filing requirements.

  3. Enforcement activity is defined as the frequency and severity with which a country’s legal regime imposes sanctions on capital market participants (Jackson 2006).

  4. Romano and Guerrini (2012) who cite a previous version of our paper are a notable exception.

  5. See European Corporate Governance Institute—Index of all codes (http://www.ecgi.org/codes/all_codes.php).

  6. SEDAR is the official site that provides access to public securities documents and information in Canada (www.sedar.com). It is similar to EDGAR in the United States.

  7. We used the same six size categories as in SEDAR: less than 5 million in assets, between 5 and 25 million, between 25 and 100 million, between 100 and 500 million, between 500 million and 1 billion, and more than 1 billion.

  8. According to MI 52-110, financial literacy is the ability to read and understand a set of financial statements with comparable breadth and complexity of accounting issues.

  9. A non-affiliated blockholder is an independent blockholder from the management.

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Acknowledgments

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.

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Correspondence to Nadia Smaili.

Appendix

Appendix

See Tables 7 and 8.

Table 7 Default description with regard to OSC financial statement filing requirements (policy 51-601)
Table 8 Examples of issuers in default

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Smaili, N., Labelle, R. Corporate governance and accounting irregularities: Canadian evidence. J Manag Gov 20, 625–653 (2016). https://doi.org/10.1007/s10997-015-9314-4

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