According to Farber (2005), the issue of fraud in corporations has a negative impact on how governance of the same organizations is conducted. In fact, Farber (2005) allege that it is difficult to restore trust after incidences of financial fraud are reported. The author samples at least 87 companies that has had fraudulent claims in the previous years. However, the author’s opinion on the credibility of a financial reporting system after a fraudulent case is intriguing. In this case, the author alleges that the quality of the governance mechanism is affected by fraud. From the article, it is evident that majority of the fraudulent claims are characterized by manipulation of accounting records (Farber, 2005). The authors uses previous studies and records to support the opinion on how companies with fraud claims are characterized by poor governance. In addition, the article claims that many of fraudulent companies do not include external auditors (Farber, 2005). Moreover, fraud in organizations is caused by some of the board members who control the management structures. In this context, it is difficult to conduct effective auditing on internal staff who are likely to manipulate accounting records (Farber, 2005). In case a fraudulent claim is confirmed, it is difficult to restore trust. For this reason, investors prefer working with companies that are credible and have improved governance performance.
The author introduces the topic of study by linking poor corporate governance to financial fraud. The author’s opinion on weak corporate governance is valid. In this context, the author uses secondary research sources in the literature review section to provide in-depth information about corporate governance and financial fraud. In the literature review section, the author investigates how several companies have detected financial fraud and strategies to prevent the vice. From the literature review, it is clear that many of the companies find it challenging to restore a competent accounting system after fraud cases. From this perspective, the study samples 87 companies with experience on financial fraud. The researcher seeks to find how the companies established measures to prevent future financial reporting fraud. According to the author’s opinion, the companies tried to improve on corporate governance but with minimal trust among the investors.
I agree with the author’s opinion about how poor governance is directly associated with financial reporting fraud. Although the author’s opinion is anchored on a study, secondary sources are used for emphasis and additional information. For this reason, it is difficult to substantiate the research findings. In fact, the author is categorical that little is known about how companies react to fraudulent claims. I agree that it is difficult for investors to trust organizations that are considered fraudulent.
On the other hand, the author’s opinion about governance and financial fraud is not correct. The generalization aspect about governance and its contribution to fraud is weak. From a critical perspective, financial reporting fraud does not entirely emanate from poor management but dishonest accountants. Sometimes, lack of proper accounting practices such as record keeping and reporting results to fraudulent claims. In this context, it is simpler for the organization to correct the mistake and avoid mistrust from the investors.
The author’s opinion is critical for establishing an in-depth discussion about the impact of poor corporate governance on financial reporting. The author’s opinion is informative and can be used by corporations to understand why investors do not trust companies with fraud cases.
Reference
Farber, D. B. (2005). Restoring trust after fraud: Does corporate governance matter? The Accounting Review, 80(2), 539-561.