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ISSN : 1598-7248 (Print)
ISSN : 2234-6473 (Online)
Industrial Engineering & Management Systems Vol.16 No.4 pp.507-516

Corporate Governance and Financial Fraud: Cognitive Evaluation Theory Insights on Agency Theory Prescriptions in Companies in Tehran Stock Exchange

Masoud Taherinia*, Najmeh Tavakoli, Fatemeh Tavakoli
Department of Accounting, Lorestan University, Khoramabad, Iran
Department of Accounting, Islamic Azad University, Shahrakord, Iran
Department of Electrical and Computer Engineering, Sharekord University, Iran
Corresponding Author,
20170808 20170821 20170918


The aim of this inquiry is to investigate the effect of corporate governance on fraud contingency in the cognitive valuation theory that has evaluated fraud contingency in 158 companies of Tehran stock exchange from 2011 to 2015. Logistic regression test has been used to verify the hypotheses. Results of the inquiry have shown that there isn’t any meaningful relationship between external corporate governance (institutional ownership) and the likelihood of fraud. Institutional ownership cannot affect the likelihood of fraud through more inspections on managers in order to control opportunistic demeanor and decreasing agency. One reason for above conclusion is cognitive evaluation theory because cognitive evaluation theory claims that, external pressure and control may excite the internal motives caused by managers independence and leads them to committee fraud in financial statements, in this way, pressure and control eliminate fraud contingency even it can have inverse effect. The other results of this inquiry are lack of relationship between domestic corporate governance (size of the headboard, percentage of non-obligated managers and the role of headboard dichotomy) and fraud contingency. But there is relationship between headboard’s reward and fraud contingency, based on the cognitive evaluation theory external rewards may increase fraud contingency in companies.



    Separation of management and ownership as one the most prominent characteristics of joint-stock companies and authorize the manager in preparing and presenting accounting reports (as one of the most important out puts of economic unit) propounds the controversy of conflict of interests between different benefi ciaries of the economic unit and also it has accentuated the necessity of inspection on mangers by stockholders. According to this property, managers are being abled to have absolute access to most important parts of the financial information of the organization. When this property gets alongside the aural accounting because of debts (difference between cash and accrued profit) and motivations such as reward, evasion from regulations, daily increasing of competitions and etc. will exhort managers to falsify information toward his or her interest even in contrary of others interests. Or in the other words they commit fraud in financial reports (Ghodrati and Feizi, 2015).

    On this account existence of a cohesive mechanism to restrain this phenomenon, aligning the interest of the beneficiaries and also Direction up to the goals of the organization by all beneficiaries “corporate governance” has been posed. We can define “corporate governance” as codes, processes, cultures and relations that should be exist between stockholders, managers and auditors to ensure the interests of the minority stockholders, preventing misfeasance and reaching the goals such as responsiveness, limpidity, justice, and observing beneficiaries rights (Ebrahimi et al., 2015).


    2.1.Intrinsic and Extrinsic Motivation

    Needs create incitement cases in us, butcausality observation of the daily behavior indicates that sometimes our needs are hidden or at least they are in our consciousness. People does not always create their incitement sometimes they got passive and let their environment creates incitement for them.


    Intrinsic motivation is a natural tendency to devote the appetence, using abilities to fulfill the actions, searching for optimum challenges, and dominating these challenges. Intrinsic motivation self-simulated from psychological needs, curiosity, and natural efforts to growth. When people got motivated intrinsically it is because of, interest the feeling that the challenges create, and for the feeling of pleasure that they do it. This happens because of self-stimulation not any external effect. People experienced the intrinsic motivation because of psychological needs that they have inside their selves.

    2.1.2.Extrinsic motivation

    Extrinsic motivation comes from environmental encouragements and consequences. Extrinsic motivation deals with consequences which are separated from it, instead of activities that have been done for experiencing inbred happiness.

    Extrinsic motivation derives from “doing this to achieve that motivation” normally it seems that behaviors that motivated intrinsically and extrinsically are closely same. As an intrinsically motivated person reads books, paints, goes to school or work, an extrinsically motivated does so too, most of the actions that we take during a day are not provocative. All kind of extrinsic motivations have extrinsic correlation with activities that we are wanted to do take. In practice this extrinsic correlation; develop an extrinsic motivation that the action cannot develop it. The behaviors that have been set extrinsically are done to gaining reward or fulfilling inner demands. Existence of extrinsic motivators (like rewards and threats) for whom that were adjusted extrinsically adjusts decreasing and increasing motivation. A person who adjusted exteriorly if there was not any external incentive it is hard to take an action.

    External rewards, pressure and control for activity that has been token internally is interesting, intrinsic motivation normally undermine the future. Reward will decrease the intrinsic motivation when a person expected that doing the duty will earn him a reward. The expected rewards will undermine the intrinsic motivation but unexpected rewards will not do that. Corporeal rewards like money, gifts, and food decrease intrinsic motivation, but verbal rewards (not corporal) like encouragement, do not increase it. Corporal and expected rewards do not just threat intrinsic motivation, they also they disorder the quality and process.

    2.2.Cognitive Evaluation Theory

    “Cognitive evaluation theory” was presented in organizational psychology by Leon Festiniger. According to theory that was presented in late 1960s, external excitants cause declining in general motivation level. Thus if an organization using rewards and punishment to compensate the operation, the intrinsic motivation will decrease, in the other word, is some-one is rewarded for his or her favorite job, the inner motivation of him or her will abate. Something that is hidden behind using the extrinsic motivators is forming others behaviors, impressing on behaviors, and controlling them. But there is another goal. The feedback of stimulators make him aware his worthiness in a job. Rewards like money, remunerations, good marks, fellowships, and oral eulogies not only enhance the action, but also send this massage that the action has been done well (means posting the ability). Cognitive evaluation theory represents that all external events, have controlling and informing roll. This theory assumes that men need psychological demands like self-dependence and competence. There are some intrinsic motivators in cognitive valuation theory framework that influence intrinsic moti vation “when external rewards and punishment can diminish the intrinsic motivation” (Bertelli, 2006). in this theory is assumed that men demands needs like selfdependence and competence. The controlling aspect external events will influence the self-dependence need.

    The element of this theory believes that people demand two inborn needs, “independence” and “competence” (Deci and Ryan, 2000). Independence means that, one him or herself decides and believes in him or herself and competence means that someone has this ability to influence the important problems (Stone et al., 2009: 77) in terms of intrinsic motivation level of independence and competence feels when people have deciding authority (Deciand and Ryan, 2012). In cognitive valuation theory there are some controlling methods that cause descending in peoples’ intrinsic motivation (Dalton, 2007). There are too many studies that support this theory, external controlling decreases peoples’ motivation in doing their duties (Bebchuk et al., 2009). According to this theory we can decline peoples’ motivation to make them adopted with employees and managers (Osterloh et al., 2002).

    2.3.AGENCY Theory

    In academic literature of accounting and finance, Agency theory has been mostly used as the start point of explaining corporate governance. Some of the demerits of Agency theory are: conflict of interests, information asymmetry between owner and managers and participation in risk. Conflict of interest means that: owner of a company that submits authority to his or her agency, expects manager’s actions to concord with his interest, but the manager has personal interests that not only are not in the same axis with owners but also conflicted with them too. On the other hand information asymmetry causes will decrease the efficiency manager’s surveillance in case the owner doesn’t have any information if the manager fulfills his duties for the company’s interests or not.” Or mangers may abuse their informational privilege that may lead into ethical or selection risk. For instance domestic shareholders can sell their stocks thanks to their quick access to secret information, before public disclosure if any fraud or problem happens, the burden of problems falls on the shoulders of exterior shareholders. Another problem of agency is that owner of the company evades risks, while managers may want to risk more, so they do actions that are inconsistence with owner’s will. Base on the Agency theory if chief executives were observed the possibility of fraud will decrease.

    2.4.Definition of Fraud

    There are too many definitions on fraud such as, “fraud is strange inappropriate, deceptive, and subtly methods that are used to deceive people, for which There is not any simple regulation. Fraud is a man- made effort that contains deception, aim, wish rage, captivate risk, violation of trust and rational justification etc. Association of certified fraud examiners has accepted an inclusive definition of fraud and represented that as, “fraud contains all man-maid tools, using which one takes advantage of others through false recommendations or hiding truth and it covers all sudden events, tricks, cunnings and hidings, and other unfair ways to deceive others. In another words, fraud is intentional actions of one or more manager, employee, or a third person that leads into misrepresentation of financial statements. In recent researches, it has been noted that committing fraud in financial statements by managers is the result of different causes such as, failure of ethics, managers’ rights and salaries, lack of tutorial on ethics of business in educational program, and being under pressure by the shareholders and short term strategies (Shourozi, 2015). American institute of certified public accountants has introduced three elements as fraud condition that are, justification, pressure, and opportunity. In fact people consciously justify reasons to commit fraud, or they know as a results, some pressures or even opportunities creates the chance (Ebrahimi and et al., 2015).

    2.5.Literature Review

    Cognitive valuation theory (Boal and Cummings, 1981; Deci, 1971, 1975) explains that how intrinsic motivators can have reverse effect. The fundamental principle of cognitive valuation theory is motivator behaviors are intrinsically function of person decisions and its need of autonomy. Philips & lord, 1981 claim that external controls, supervisions and pressures can control a person motivation for taking the task (Frey and Jegen, 2001).

    With cognitive valuation theory (Dessy and Ryan, 1985), it can be shown how external corporate governance with influence on mangers intrinsic motivation can prevent committing fraud.

    The use of financial ratios is one of the easiest methods for detecting financial fraud. Beneish et al. (2011) conducted research on the role of auditing intelligence in predicting stock returns. Their research period is between 1998 and 2002. They used the (Beneish, 1999) to calculate the likelihood of fraud in companies and divide them into two dishonest and non-fraudulent groups, then with the help of this model they predicted stock returns.

    Shi et al. (2017) examines the impact of foreign corporate governance and the possibility of fraud with a cognitive assessment approach. In this research they identified fraudulent companies from non-fraudulent companies to investigate the relationship between corporate governance and the likelihood of fraud. The statistical population of this research was 256 companies during the period of time between 1999 and 2012. The dependent variable of this research is committing fraud and its inde pendent variable: 1. Institutional ownership. 2. Defense against property bills. The results of this research indicate that Due to the pressure and control of external corporate governance on manager there is no significant relationship between variables that this non-relation is in terms of the theory of cognitive assessments. Abdolmohammadi et al. (2010) examined the relationship between corporate governance rankings and financial fraud rates. They tested 36 companies that were fraudulent in their 2003 financial statements and tested a sample of non-fraudulent companies. In 2003, the two groups ranked the same, while in companies that were cheating, the next year (2004) their governance system improved and returned to lower levels in the next two years.

    Sajjadi and Kazemi (2016) presented a comprehensive fraudulent financial reporting model in Iran through the field-based theorizing. In this research, using a fieldbased approach and analyzing documents which is a comprehensive fraud pattern is presented in financial statements. The research community included interviewing experts and a snowball sampling method. The results of this research indicate that the stress factor of the signification condition was reportedly fraudulent and 25 were identified as fraudulent.

    Safarzadeh (2010) explores the role of accounting data in creating a pattern to explore the factors associated with fraud in financial reporting. His classification of fraudulent companies based on the inclusion of companies in the securities and stock exchange listing system has been selected for reasons connected with distortion of financial data and execution of final transactions and arbitration is not issued by the court regarding distortion in financial reporting. After analyzing the ten financial ratios, they were introduced as potential predictors of fraudulent financial reporting.

    Etemadi and Zalaghi (2013) examined the application of logistic regression in identifying fraudulent financial reporting. He considered other criteria as the existence of fraudulent circumstances with respect to previous investigations, which included: 1) uncontested audit opinion; 2) tax disputes with the tax area in accordance with the statement of income tax and tax records; and clause of the audit report. 3) There are some important annual adjustment and revised financial statements, which are solid for at least three years for a fraudulent company, and the existence of these three conditions is a condition of classification in the group of companies that are likely to be fraudulent. And at the end he presented an acceptable model in stock exchange for financial statements.

    Ebrahimi et al. (2016) A studied titled Criminals In Search of Fraud and Forecast of Future Income Stocks This research period was from 2008 to 2012 Using the Bonn’s model, the relationship between probability of fraud and return on owners’ equity is the result of this research can be done through establishing a direct and significant relationship between the probability of fraud and the return on owners’ equity.

    According to the results of this research, there is a relationship between non-obligated members on the board of directors and the owners of the company (Shorozi et al., 2015), a research on the relationship between corporate governance and company performance based on fuzzy regression among 151 companies. Fuzzy coefficients were used in this research. An entity was approved by the company’s performance. There was also no significant relationship between the dual role of the CEO and the company’s performance.


    Model of this research is designed based on Beneish model (1999) a model founded to detect offender companies from non-offenders. The model that has been presented by Beneish is also known as PROBM. Since accuracy of this model has been tested in different periods it is considered a standard model. Beneish identified in his main article with data from 1982-1988 the offender companies, in second period of his investigation from 1989 to 1992 and also because this model identifies commitment of fraud just by using financial statements, if a company tries to commit fraud in addition to manipulation information on financial statements will decrease, among other affective factors that have impact investors and financial analyzers. Beneish has chosen research variables with us of three points of views.

    The first point of view in choosing variables in model, is from the companies whose future outlook is not a method so the possibility of fraud contingency is very high. This point of view has been selected by universal studies and accounting specialists.

    In second point of view in choosing variables in model is by cash flow and accrual items which has been done on Healy (1985) and Jones (1991) studies.

    In third point of view, choosing variables is based on earning management motivations in Agency theory that it is chosen based on Watts and Zimmerman (1986) studies.

    In this inquiry the independent variable is fraud contingency (PROBM) with using Beneish model, is calculating like equation number 1.

    P R O B M = D S R + G M I + A Q I + S G I + D E P I + S G A I + L E V I + T A T A

    PROBM is probability of profit manipulation or in other words, fraud contingency. It includes 8 variables that extract by using financial statements.

    • 1. The DCR index: according to equation 2, this index is calculated through the ratio of accounts receivable to sales in the year = t, divided into same ratio in t-1.

      D S R : ( ( a c c o u n t r e c i v e d ) s a l e s ) t ( a c c o u n t r e c i v e d s a l e s ) t 1

      This index indicates that, demands and incomes in consecutive periods are mismatched. Huge increase in companies’ sale shows changes in companies’ credibility, so receiving accounts should rise as much. If sales rise a lot but the receiving accounts do not increase as much as them it shows distortion in income and sales.

    • 2. The GMI index: this is calculated with equation 3 by dividing gross profit in the power of t-1 year to gross profit t year

      GMI = ( g r o s s p r o f i t p e r c e n t a g e ) t 1 ( g r o s s p r o f i t p e r c e n t a g e ) t

      If this index was bigger than one, shows gross profit growth. As indicated in his investigation that reduction of gross profit is a negative sign for future of the company. So in these companies the fraud contingency in incomes is too high. So it is expected that there is a positive relationship between GMI and fraud.

    • 3. AQI index: in this index equation 4 is calculated with sum of current assets and fixed assets divided to total assets and the result will subtract one and the result of the text in year t divided on the same amount in year t-1

      AQI = ( 1 ( { current asse + fixed assets } / a s s e t s ) t 1 ( { current asse + fixed assets } a s s e t s ) t 1

      If this ratio is greater than one, it indicates reduction in company’s properties, in another word some parts of company’s properties transcended in to expenses.

    • 4. The SGI index: this index which is based on equation number 5, sell in year t is divided to sell in year t-1

      SGI = ( s e l l ) t ( s e l l ) t 1

      Generally increase of this index, does not show committing fraud and distortion, but managers of big companies are always under the pressure of financing and increasing stocks price. In this companies if the sale increase were negative, worth of stocks will decrease and impose more costs on managers. So managers usually try to hide negative sales rate. Therefore it is expected that there is a positive relationship between SGL and fraud contingency.

    • 5. DPEI index: in this index according to equation number 6 depreciation has been divided to sum of depreciation and fixed assets and result of this statement for t year is divided to result of this statement for t-1 year

      DEPI = ( depreciation depreciation+six ) t 1 ( depreciation (depreciation+six ) t

      If the result was more than one it shows that depreciation costs has decreased compared to the last year. This may happen by increasing the shelf life of properties, or has been done in depreciation methods, so a positive relationship between DEPI and fraud contingency is expected

    • 6. The SGAI index: in this index selling and administrative costs and sell are divided into sell, the result of that in t year is divided to the result in t-1 year

      SGAI= ( selling and administrative costs/sell ) t ( selling and administrative costs/sell ) t-1

      The increase in this index indicates a decrease in productivity of selling and administrative departments. In other words, there is a kind of disproportion between administrative costs and selling price that we can predict there is a positive relationship between SGAI and fraud contingency.

    • 7. LEVI index: according to LEVI index all of the debts is divided into all of the assets and the result of this statement is divided into t year and such amount in t-1 year

      LEVI = ( a l l o f t h e a s s e t s + a l l o f t h e d e b t s ) t ( a l l o f t h e a s s e t s + a l l o f t h e d e b t s ) t 1

      If this number is larger than one, it can b deducted that the amount of leverage and debt use has increased this year compared to the previous year. Increasing of the debts creates an appropriate background for committing fraud.

    • 8. TATA index: based on this index in equation (8) profit before unexpected events should subtracted from cashes and divide into all the properties for each year.

      TATA =  profit prior extraodinary items-cashe flows fromoperating activitie all assets

      The deductible face represents accruals, and according to the many studies that have been done like Healy (1985) and Jones (1991), the increase in accruals represents an increase in the likelihood of fraud.

    The independent variable of corporate governance variables

    External corporate governance:

    • 1. Percentage of institutional investors

    Internal corporate governance

    • 1. Percentage of non-obligated members

    • 2. Binary role of head board

    • 3. Size if headboard

    • 4. Reward of managers and the headboard

    Auxiliary variables

    • 1. Size of the company: natural logarithm of total assets

    • 2. Financial leverage: Long-term debt ratio to assets


    5.1.Statistical Society

    The statistical society of this inquiry was anyone who had been accepted in Tehran’s stock exchange. Sample is limited parts of the population that explain the basic aspects of the population. In order to acquire good sample, the systematic removal method was used in this research. The research was done in a five years period, from 2011 to 2015. The 158 companies that have been accepted in Tehran’s stock exchange should have one of these characteristics, each company that had these characteristics had been chosen for the sample and others crossed out.

    • 1. The company should have been accepted in stock exchange before 2011 and will be active till 2015.

    • 2. Due to the specific nature of Holding companies, banks, insurance, leasing, Financial institutions and Investments, and their significant differences in manufacturing and commercial companies should not be limited to the mentioned companies.

    • 3. The fiscal year of the company will end on the last day of March and does not change the financial year.

    • 4. The company is not subject to Article 141 of the Commercial Code and the financial information of the company is reachable.

    5.2.Data Collecting Method and Research Method

    In this research the initial data that is related to literature review has been extracted from related books and articles. In order to test the hypothesis, all the information that was related to the companies was extracted from stock exchange site. Method of this research is “correlation type.” Relation and correlation between variables was estimated through regression and the type of methodology is after type.

    5.3.Research Hypothesis

    The goal of using corporate governance is to ensure finding a framework that creates a balance manger’s freedom, accountability and stockholders’ interests. There are several corporate governance mechanisms such as independent auditing, internal controls, audit committees, statutory oversight, managers, and the separation of chief executive officer and institutional investors. In this study, the relationship between a number of corporate governance mechanisms, such as non-The duties of the board of directors and the dichotomy of the role of the board of directors and the size of the board of directors, institutional owners and remuneration of the board of directors are examined for the contingency of fraud.

    The existence of non-executive directors and the separation of duties of the chairman and CEO are among the motivators that, due to greater autonomy in decision making, reduce the problems of agency and improvement of the company’s performance. One other factor in reducing the cost of agency the existence of institutional investors is the composition of its shareholders. Such investors closely monitor the performance of corporate executives and push the company and its executives to decide whether to buy or buy shares or exercise control over management. Institutional investors usually want to provide accurate and timely information about the company. The following hypotheses are considered for research:

    First main hypothesis: there is a meaningful relationship between external corporate governance and fraud contingency

    Second main hypothesis: there is a meaningful relationship between internal corporate governance and fraud contingencyTable 1

    Sub hypothesis

    • Hypothesis 1: There is a significant relationship between the percentage of institutional investors and the probability of fraud.

    • Hypothesis 2: There is a significant relationship between the ratio of non-obliging managers in the composition of the board and the probability of fraud.

    • Hypothesis 3: There is a meaningful relationship between the duality of the role of the board of directors and the probability of fraud.

    • Hypothesis 4: There is a meaningful relationship between the size of the board of directors and the probability of fraud.

    • Hypothesis 5: There is a meaningful relationship between managers and the board’s reward and the probability of fraud.

    5.4.Data Requirements and How to Use and Extract Them

    One of the most important obligations of the research is significant and reliable data because data is the base of future analyze and judgment


    In this part, we study and analyze the result given by SPSS. Firstly, the dependent variables of the research, including 8 variables of DSR, GMI, AQI, SGI, TATA, DEPI, SGAI, LEVI, in every year for each existing company, the sample was being calculated, and by putting it on BNISH model, the PROBM value of the companies was separately determined for each year.

    After PROBM value was determined, we separate dishonest companies from the honest ones. According to Beneish model (1999), if PROBM model is bigger than - 1/78, the company is called dishonest and for smaller values we call it honest. This research, in addition to describing how to distinguish dishonest companies from the honest ones, looks for the effect of company leadership on probability of fraud which is ascertained by examining the hypothesis.

    6.1.Examining the First Hypothesis

    The first hypothesis: there is a meaningful relationship between external corporate governance and probability of fraud.

    Sub hypothesis: there is a meaningful relationship between the percentage of institutional investors and probability of fraud.

    In order to study the effect of foreign company leadership of probability of fraud, logistic regression analysis has been used. This hypothesis included an independent variable (the percentage of institutional owners). The hypothesis was not statically meaningful, X2 (1, N = 790) = 0/077, P > 0/05, which it shows that there is not a meaningful relationship between the percentage of institutional owners and probability of fraud, which means institutional owners are not capable of affecting probability of fraud by controlling and observing. This model generally stated 0% (Nagelkerke R Squared) and 0% (Cox and senellRsquare) from the variance of probability of fraud.

    Table 2 shows that there is no meaningful relationship between the percentage of institutional owners and probability of fraud (P > 0/05).

    6.2.The Second Main Hypothesis: There is a Meaningful Relationship between Internal Company Sovereignty and Probability of Fraud

    Sub hypothesis: there is a meaningful relationship among the ratio of non-bound managers in the board, board role duality, the size of the board, managers and board’s reward and probability of fraud.

    In order to examine the effect of among the ratio of non-bound managers in the board, board role duality, the size of the board, managers and board’s reward and probability of fraud, logistic regression analysis has been used. This main hypothesis includes four sub hypotheses (the ratio of non-bound managers in the board, board role duality, the size of the board, managers and board’s reward). The complete model was statically meaningful X2 (4, N = 790) = 10/18, P < 0/05, which shows that this model is capable of distinguishing the companies that reported the probability of fraud or didn’t. this model generally stated between 0/017% (Nagelkerke R Squared) and 0/014% (Cox and senellRsquare) of the variance of probability of fraud, and correctly categorized 58/1% of the models. As shown in Table 3, only one of the independent variables had a unique meaningful share in the model (managers and board’s reward). Managers and board variable has a 1 probability factor. It shows that companies which had managers and board’s reward, is likely to report fraud more than one time as many than ones that didn’t.

    In this research, the variables of the company size and lever are considered as control variables the results of Table 4 and Table 5 confirm the prove the results of existence of a meaningful relationship between control variables and probability of fraud. So, this research shows that the company size and financial lever have a direct relationship with probability of fraud.


    In recent years, paying attention to fraud problem, specifically in globalization of economy and trade is increased. Contrast of profits and lack of information conjunction between the ownership and management may result in financial corruption. Also assigning tasks and responsibilities to managers can open the gate of fraud. In such a situation the role of the board is to observe and control .The purpose of this research is to study the relationship between corporate governance and probability of fraud. In this research, in order to distinguish dishonest companies from the honest ones, BNISH model has been used. Institutional ownership, the board size, the percentage of non-bound managers, the board’s role duality and the board’s reward are considered as corporate governance’s compilations.

    The results of the first hypothesis show that there is no meaningful relationship between the percentage of institutional owners and the probability of fraud. According to the agency theory, external corporate governance reduces information asymmetry to protect the interests of shareholders and prevents companies from being cheated; while the results of these studies indicate that external corporate governance (institutional owners) with The exertion of external pressure and controls will reduce the internal motivation of managers and focus their focus on the interests of shareholders, and may even lead them to financial fraud; this result is in line with the cognitive assessment theory, which is a theory of organizational psychology. Supervision, control and enforcement by institutional owners reduces the independence of managers and stimulates internal motivation and encourages them to behave fraudulently. The results of this study are consistent with the results of Shi et al. (2017).

    The results of the second hypothesis show that there is not a meaningful relationship between the ratio of nonexecutive directors as well as the size of the board and the role of the Board’s dichotomy and the probability of fraud, but there is a meaningful relationship between the reward of the board and the probability of fraud. One of the reasons for this conclusion is that the limited participation of board members, especially the non-executive board, is in supervising corporate executives. The task of the chairman of the board is to ensure the availability of financial resources and manpower, evaluate the performance of managers, control the risk and communicate effectively with the shareholders, and the CEO will be responsible for the executive, but in our country, the board of directors, in accordance with the law of commerce, simultaneously performs both strategic and executive tasks; and these two tasks (the CEO and the chairman of the board) are not well separated. In this way, the board has a dual role and loses its independence and cannot effectively play its supervisory role.

    Interpreting the result of the hypothesis, the effect of the percentage of non-executive directors on the probability of fraud in our country, in fact, non-executive directors interfere solely with decision making and ignore their supervisory role, as well as the simultaneous membership of non-executive members in the board of directors of several companies may also depend on the supervisory role of the board The board is reduced, while it seems independent.

    As regards the results of the hypothesis, the effect of board size on probability of fraud, which suggests a lack of meaningful relationship between the risk of fraud and the size of the board, can be stated that the size of the board has no effect on the probability of fraud in Iran, and maybe in this study, since most of the tested companies had the same number of board members, the test of this hypothesis did not provide a reliable result.

    Another result of this study is that there is a meaningful relationship between the reward of the board and the probability of fraud. The remuneration of the board affects the probability of fraud. The result of this hypothesis is that in companies with a board reward, there is a greater risk of fraud for companies that do not have a reward for the board. If the remuneration of the board is reduced by reducing the conflict between managers and shareholders in order to increase the company’s wealth, it will ultimately reduce the cost of agency.

    The cognitive assessment theory states that external rewards, when the person is busy, diverts his attention from proper activity to reward; and if the reward of the board is subject to managerial performance, the material rewards will reduce the quality of manager’s performance. And encourages managers to cheat and manipulate profits. In general, from the test results of this hypothesis, it can be concluded that in companies where the remuneration of a board is a function of the firm’s profit (profit), the risk of fraud is greater because managers by getting material rewards, their intrinsic motivation will be weakened and cheating for more rewards.

    The findings of this research in general indicate that corporate governance is not affected by the possibility of fraud. Perhaps one of the reasons for this lack of influence is the lack of a complete corporate governance system in Iran, or the lack of regulations on corporate governance and the non-enforced implementation of these regulations.

    7.1.Research Suggestions

    7.1.1.Application of Research

    Regarding the meaningful effect of the remuneration of the board on the probability of fraud, it is suggested that the company, for the remuneration of the board, not set the benchmark as the performance of managers, because the rewards of managers can increase the incentive to commit fraud.

    7.1.2.Proposal for Future Research

    • 1. One can examine the impact of corporate governance and corporate helplessness.

    • 2. It is possible to examine the impact of corporate value on the probability of corporate fraud.

    • 3. We can examine the impact of corporate governance and the possibility of fraud using other psychological theories and organizational behavior.

    7.2.Research Constraints

    Fraud can also occur through confidential information holders. Senior executives of companies are able to commit financial statements to deceive investors and lenders, or to spill over profits, and subsequently receive higher salaries and higher rewards.

    In our country, there is no institution directly to investigate and detect possible cases of fraud, nor any information base to report such cases. Institutions, such as the Stock Exchange, do not place potential misleading information, and in particular fraud, in financial statements to the public and analysts. The only cases that are tracked in the Stock Exchange are fraudulent intruders (especially directors) in these companies, and if they issue a vote through the courts, the cases are privately disclosed. The lack of research studies in this area is another significant limitation.



    Data defines the method of its extraction

    Summary of logistic regression to predict probability of fraud

    The summary of logistic regression to predict probability of fraud

    The summary of logistic regression to predict probability of fraud

    The summary of logistic regression to predict probability of fraud


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