. This paper explores the relationship between gift giving, guanxi and corruption through a study of the relationships between UK manufacturing companies in China and their local component suppliers. The analysis is based on interviews in the China-based operations of 49 UK companies. Interviews were carried out both with senior (often expatriate) staff and with local line managers who were responsible for everyday purchasing decisions and for managing relationships with suppliers. The results suggest that gift giving is perceived to be (...) a significant problem in UK-owned companies in China. However the relationship between these payments and established understanding of gift giving within guanxi-networks appears to be weak. Gift giving appears to be associated with illicit payments, corruption and the pursuit of self-interest. Firms seek to reduce the incidence of illicit transactions by changing staff roles, instituting joint responsibilities, which include the separation of different aspects of sourcing/purchasing, ineasing the involvement of senior staff in the process and through the education of employee and suppliers. (shrink)

Although US and European research has documented improvement in earnings quality associated with corporate governance characteristics, the situation in Latin America is questionable, given the business environment in which firms operate, which is characterized by controlling family ownership and weak legal protection. The purpose of this study is to examine the relation between the internal mechanisms of Corporate Governance and Earnings Management measured by discretionary accrual. We use a sample of listed Latin American non-financial companies from the period 2006–2009. Our (...) results show how in the Latin American context the role of external directors is limited and that Boards which meet more frequently take a more active position in the monitoring of insiders, so showing a lower use of manipulative practices. In addition, we find a non-linear relation between insider ownership and discretionary accruals, also pointing to the fact that ownership concentration may be a manipulative practices constrictor mechanism only when the ownership of main shareholders is moderate. The findings have important policy implications since this is, to the best of our knowledge, the first study to analyze the relation between the effectiveness of the government and the earnings management behavior. As policy implications, we document how when a country implements controls aimed at reducing corruption, strengthening the rule of law or improving the effectiveness of government, this leads to a reduction in firm earnings management. (shrink)

This article examines the impact of the prevailing state ownership in the Chinese stock market on corporate governance and the financial regulatory system, respectively, as the internal and external monitoring mechanisms to deter corporate fraud and protect investors. In line with the literature that state ownership exaggerates the agency problem, we find that the retained state ownership in privatised firms increases the incidence of regulatory enforcements against fraud. For the state-owned enterprises (SOEs), however, larger state ownership is associated with a (...) lower incidence of enforcement actions. This is attributed to the mutual political affiliation of the fraudulent SOEs and the regulatory commission. A new regulation "Solutions for Listed Firm Checks" promulgated in March 2001 has mitigated this effect by empowering the regulatory commission to increase the severity of regulatory conditions. Our evidence confirms the improvement in the regulatory environment and investor protection in the Chinese stock market brought about by the regulatory reform and development. (shrink)

This article proposes and empirically tests a theoretical framework incorporating Reidenbach and Robin’s (J Bus Ethics 10(4):273–284, 1991 ) conceptual model of corporate moral development. The framework is used to examine the relation between governance and business ethics, as proxied by diversity management (DM), and financial reporting quality, as proxied by the magnitude of earnings management (EM). The level of DM and governance quality are measured in accordance with the ratings of Jantzi Research (JR), a leading provider of social and (...) governance research for institutional investors. This DM score is part of an index developed by JR that investment managers use to integrate DM criteria into their investment decisions. As expected, a negative relation between corporate DM development and financial reporting quality is found while controlling for other factors known in the literatures on governance and accounting choices to affect earnings quality. Despite some caveats presented in conclusion, this study contributes to the ethics, governance, and financial reporting literatures by studying the dynamics between governance and ethics in the prevention of EM. (shrink)

The conceptual model presented in this article argues that corporations exhibit specific behaviors that signal their true level of moral development. Accordingly, the authors identify five levels of moral development and discuss the dynamics that move corporations from one level to another. Examples of corporate behavior which are indicative of specific stages of moral development are offered.

We examine enforcement action in China’s emerging markets by focusing on the agents that impose this action and the role played by supervisory boards. Using newly available databases, we find that supervisory boards play an active role when Chinese listed companies face enforcement action. Listed firms with larger supervisory boards are more likely to have more severe sanctions imposed upon them by the China Security Regulatory Commission, and listed companies that face more severe enforcement actions have more supervisory board meetings. (...) Our findings are of interest, as supervisory boards in China are generally perceived to be dysfunctional. This study contributes to the existing literature in three ways. First, we shed light on the effects of supervisory boards whose role in a fraud setting has not yet been examined. Second, the study has important policy implications for governance reform. Finally, our analyses provide the most up-to-date picture of fraud and governance issues in China’s ever-growing markets. (shrink)

The rising tide of corporate scandals and audit failures has shocked the public, and the integrity of auditors is being increasingly questioned. It is crucial for auditors and regulators to understand the main causes of audit failure and devise preventive measures accordingly. This study analyzes enforcement actions issued by the China Securities Regulatory Commission against auditors in respect of fraudulent financial reporting committed by listed companies in China. We find that auditors are more likely to be sanctioned by the regulators (...) for failing to detect and report material misstatement frauds rather than disclosure frauds. Further analysis of the material misstatements indicates that auditors are more likely to be sanctioned for failing to detect and report revenue-related frauds rather than assets-related frauds. In sum, our results suggest that regulators believe auditors have the responsibility to detect and report frauds that are egregious, transaction-based, and related to accounting earnings. The results contribute to our knowledge of auditors’ responsibilities for detecting frauds as perceived by regulators. (shrink)

We examine the dynamics between enforcement actions and the responses from both the board of directors and supervisory boards amid China's governance reform. Rather than examining determinants of fraudulent activities, we investigate, after enforcement actions are imposed, whether the board of directors and supervisory boards react differently, and whether their different reactions play a role in preventing future occurrences of frauds. We find that both boards react to enforcement actions, but only the responses from the board of directors help us (...) curb future enforcements under certain circumstances. The supervisory board fails to play any role in preventing future enforcements, even though it is one of the two monitoring mechanisms in the listed companies. Policy implications are discussed. (shrink)

Investment products that deploy ethical values and social considerations in portfolio construction have persisted since the 1980s. Pitting Habermasian discourse ethics against Foucauldian power relations and radical institutionalism, the paper argues that socially directed mutual funds ascribe capital markets with validities of high moral magnitude, work up extant tendencies toward financial hegemony and stymie criticism of the political-economic order. Institutional pressures do not permit the exercise of an ethic stronger than an aesthetic care of the self. The balance struck between (...) economic and social priorities is investigated by interviewing investment managers, reviewing archival material and surveying the attitudes of unit holders in retail social mutual funds. (shrink)