Financial statement fraud litigation, material weaknesses, and board characteristics

David Manry, Hua Wei Huang, Yun Chia Yan

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)


Purpose: The purpose of this study is to 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. Design/methodology/approach: The results are derived from logistic regression models and data are collected from the Audit Analytics database augmented by data from CompuStat, the Stanford Law School website and the SEC Accounting and Auditing Enforcement Releases. The authors also test for endogeneity with a propensity score matching procedure. Findings: The authors 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. Originality/value: Previous research notes that board members holding multiple directorships cannot effectively oversee the financial reporting process and, thus, are associated with poorer governance. The authors extend this implication of board busyness to the association between disclosure of MW type and the filing of subsequent litigation alleging financial statement fraud. To the best of the authors’ knowledge, no other research has done so.

Original languageEnglish
Pages (from-to)349-368
Number of pages20
JournalAccounting Research Journal
Issue number4-5
Publication statusPublished - 2023 Oct 17

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance


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