AAA Spark Meeting of the Regions

Financial Statement Fraud Litigation, Material Weaknesses, and Board Characteristics

• In Event: Fraud and Financial Misstatement

Abstract

We investigate whether the likelihood that a firm will face financial statement fraud litigation is affected by the disclosure of internal control material weaknesses (MW) and the “busyness” of a firm’s board of directors. We find that an MW report is strongly associated with the likelihood of subsequent financial statement fraud litigation, and that the influence of entity-level MW on litigation likelihood is stronger than that of account-level MW. Moreover, the number of outside board directorships significantly increases the influence of entity-level MW on the likelihood of litigation, indicating that board of directors busyness significantly increases the risk of litigation.

Authors

• David Manry, University of New Orleans

• Hua-Wei Huang, National Cheng Kung University

• Yun-Chia Yan, The University of Texas Rio Grande Valley