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Directions for Reshaping Corporate Environment to Avert Financial Crisis Caused by Frauds: A Theoretical Framework

  • Crisisonomy
  • Abbr : KRCEM
  • 2013, 9(10), pp.193-210
  • Publisher : Crisis and Emergency Management: Theory and Praxis
  • Research Area : Social Science > Public Policy > Public Policy in general

Lee, Giyoul 1

1단국대학교

Accredited

ABSTRACT

Success of a nation's economy depends on how well savings are funnelled to entrepreneurs. A country that does this distribution well helps the entrepreneurs capitalize their innovative ideas and create jobs. For investors to channel their savings to entrepreneurs, they must be able to base their investment decisions on the financial information which is prepared under management’s responsibility. Motivated by personal gains, management often attempts to report financial statements fraudulently, which shakes the public's confidence in the integrity of financial reporting. To provide reliable financial information to the capital market participants for their decision making, monitoring on the financial reporting process is inevitable. Because shareholders do not directly participate in the operation of a business, they need a mechanism to protect their investments. To that end, they elect directors of the board as their representatives to watch for their interests. For directors to perform their prescribed duties, they must be independent of management and possess financial expertise. But outside directors' lack of information on the business activities restricts their abilities. Audit committee helps the board discharge their responsibilities by handing out the information that it has learned from internal and external auditors. In addition, good internal control system enhances the quality of the financial information. Internal auditors monitor and evaluate the effectiveness of internal control to locate any weaknesses and implement them. This study is aimed to help participants in the capital market make their rational decisions basing on trustworthy financial reports they were provided. To that end, tasks of the board of directors, audit committee, and internal auditors must be coordinated to ensure prevention of frauds, or detection if they occur. When they collaborate in unity, financial information provided under that governance would be reliable and help the various market participants achieve their goals.

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