29 June 2004

More Board Independence, Less Fraud?

More Board Independence, Less Fraud? - - CFO.com:

A new study finds that ''a higher proportion of independent outside directors is associated with less likelihood of corporate wrongdoing.''

Stephen Taub, CFO.com

The more independent directors on a company's board, the less likely it is to be accused of fraud, according to a study published in the June issue of Financial Analysts Journal, a publication of the CFA Institute.

Three professors — Hatice Uzun of Long Island University, Samuel Szewczyk of Drexel University, and Raj Varma of the University of Delaware, Newark — examined 133 companies accused of fraud between 1978 and 2001. The researchers matched them with 133 companies — of similar size and in the same industries — that had not been accused of fraud, then compared the two groups for statistically significant differences in board member independence, board size, frequency of board meetings, and other variables.

Compared with the control group, companies that had been accused of fraud had a lower percentage of independent directors (that is, board members with no business or personal ties to the company) and lower percentage of outside (that is, non-executive) directors.

The boards of companies accused of fraud were also less likely to have an audit committee. In addition, their audit, compensation, and nominating committees also had a lower percentage of independent directors.

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