Finance middle managers and financial statement fraud

PhD ceremony: Ms. K.G.B. Linke, 16.15 uur, Academiegebouw, Broerstraat 5, Groningen

Dissertation: Finance middle managers and financial statement fraud

Promotor(s): prof. J.A. Emanuels, prof. T.L.C.M. Groot

Faculty: Economics and Business

This study investigates the role of the Controller in occurrences of financial statement fraud in the USA. The data has been collected for the period 2000-2006, and results in 244 cases of alleged financial statement fraud; in other words manipulations performed in order to improve the income.

Evidence suggests that groups collude to commit financial statement fraud. The finance middle manager (an example is the controller) often colludes with the CFO (chief financial officer) and other top executives. The CFO and other executives may not have the appropriate knowledge to implement fraud schemes, and consequently involve the finance middle manager.

Two factors have been found that significantly relate to the involvement of finance middle managers in fraud schemes. The first factor, labelled “Greed and Collusion”, suggests that finance middle managers more frequently collude with other functions, while at the same time self-enrichment (for example insider trading) plays a role. The second factor labelled “Leverage and Incentives” relates to firm conditions. Finance middle managers tend to be more involved in fraud at firms with a high leverage, a less efficient board of directors and a more aggressive bonus policy.

A recommendation is to further investigate whether variable compensation elements are desirable for finance middle managers. In addition, the question can be raised with regard to whistleblower procedures: are these procedures sufficient to encourage finance middle managers to report fraud? More insight into the relation between the CFO and finance middle managers may help compliance officers and directors (of the board) to earlier identify risks and thereby improve financial statement fraud prevention.