A Research Report Submitted to the Faculty of Commerce University of the Witwatersrand, Johannesburg in partial fulfilment of the requirements for the degree of Mastel of Commerce Johannesburg 1995 / The King Report released in South Africa in 1994 has the potential to revolutionise the country's existing form of Corporate Governance. The objective of the report is to improve the system by which companies in South Africa are directed and controlled (King Report, 1994:1). This objective encompasses decreasing the risk of management fraud within entities. The question which this research report addresses is whether a reduction in the risk of management irregularities in an organisation can be achieved through adherence to the King Report's proposals. To obtain this answer a South African company which experienced significant management frauds was selected for examination as a case study, and a determination was made as to whether the proposals of the King Report, had they been implemented, could have prevented the irregularities which occurred in the organisation. The finding of the research is that diligent compliance with the King Report's recommendations can assist significantly ill both preventing and detecting management fraud, but is unlikely to prevent all management irregularities within an organisatlon

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The purpose of the research investigation is to consider the potential opportunities through which corporate governance may be developed to better suit the developing commercial culture within Poland. In order to do this, I formulate the following research questions: ‘What are the weaknesses of the Polish corporate governance system?’, ‘What changes should be made to corporate governance in Poland?’, and ‘Is a hybrid corporate governance model a choice for Poland?’ The concept of hybridisation is fairly new, and involves combining different approaches to corporate governance, eg it embraces combining elements of the board management and monitoring models. I examine several changes to corporate governance that can be called hybrid. They were implemented in South Africa, Japan, Malaysia, the UK and the US. The main focus, however, is put on Polish corporate governance, which I investigate from the angle of those changes. Doctrinal research is combined with a set of interviews conducted with business practitioners in Poland. Interviewees are asked to express their opinion about corporate governance in Poland. Questions are asked in the context of changes that were made to corporate governance in countries mentioned above. The interviews produce results that overlap with the doctrinal research. Polish companies have a highly consolidated share ownership structure, which has a negative influence on the allocation of power between corporate organs. The supervisory board is an organ through which the controlling shareholders extend their power. Under the Company Code 2000, the supervisory board usually appoints and removes members of the management board, and instructs them in the decision making process. The statutes might give a broader scope of powers to the supervisory board. All this results in various forms of expropriation in companies, such as, for example, stealing of profits by governing bodies, overpaying executives, or installing unqualified family members in managerial positions. In general, interviewees are pleased with the currently binding corporate governance in Poland. The majority of them are pessimistic about implementing such large changes in Poland as, for example, a one-tier board system. A significant number of interviewees propose minor changes to the Polish system of corporate governance. It should be highlighted that several non-managerial interviewees turn out to have more liberal approaches to potential changes to corporate governance in Poland. The research fills a gap in knowledge on hybrid corporate governance, as this issue has hardly been touched by the Polish legal doctrine. It also systematises and develops knowledge on hybrid corporate governance worldwide, and develops knowledge on legal transplant.

This thesis consists of three essays on the performance implications of senior decision-makers in the banking industry. While the first chapter looks at one aspect of bank performance from a regulatory perspective, the next two chapters study performance from an investor perspective. The first chapter uses regulatory enforcement actions issued against US banks to show that both board monitoring and advising are effective in preventing misconduct by banks. While better monitoring by boards prevents all categories of misconduct, better advising prevents misconduct of a technical nature. Board monitoring increases the likelihood that misconduct is detected, increases the penalties imposed on the CEO, and alleviates shareholder wealth losses following the detection of misconduct by regulators. This chapter offers novel insights on how to structure bank boards to prevent bank misconduct. The second chapter seeks to understand how the characteristics of bank executives affect the market performance of US banks. To explore the expected performance effects linked to executive characteristics, the changes in the market valuation of banks linked to announcements of executive appointments are estimated. The chapter shows that age, education and the prior work experience of executives create shareholder wealth while gender is not linked to measureable value effects. Furthermore, these wealth effects are moderated by the level of influence of incoming executives, with their magnitude diminished under independent boards and higher if the incoming executive is also appointed as CEO. The results are robust to the treatment of selection bias. This chapter contributes to the current debate on whether and how individual executives matter for firm performance. The findings also shed light on the value of human capital in the banking industry. The third chapter explores how the cultural heritage of senior decision-makers affects bank outcomes. To study cultural heritage, this chapter focuses on US-born CEOs who are the children or grandchildren of immigrants. Using a hand-collected dataset that tracks the family tree of US bank CEOs, it is shown that the cultural characteristics prevailing in the country of a CEO’s ancestors influence firm performance under pressure. How CEOs respond to competitive pressure is driven by specific cultural dimensions and is causally related to corporate policy choices. To establish causality, I use variation in industry competition generated by a quasi-natural experiment, the staggered adoption of barriers to US interstate branching in the 1990s. I also use an out-of-sample test using a non-banking competitive shock, the Canada-United States Free Trade Agreement, and find robust results.

Diese Dissertation behandelt das Thema der Finanzberichterstattung und Wirtschaftsprüfung. In einer allgemeinen Einleitung werden die gesetzlichen Grundlagen zur kapitalmarktorientierten Rechnungslegung und deren Kontrollen beschrieben. Als Folge des Bilanzkontrollgesetzes (BilKoG) wurde die Deutsche Prüfstelle für Rechnungslegung (DPR) gegründet. Diese privatrechtlich organisierte Kontrollinstanz prüft seit dem Jahr 2005 die Rechnungslegung von Unternehmen in Deutschland, die am regulierten Kapitalmarkt gelistet sind (Enforcement). Ziel ist es, eine wahrhafte und transparente Rechnungslegung im Interesse des Kapitalmarkts zu gewährleisten. Neben dem BilKoG wurde durch das am 20.01.2007 in Kraft getretene Transparenzrichtlinie-Umsetzungsgesetz (TUG) die Richtlinie 2004/109/EG in deutsches Recht transformiert. Ziel der EU-Transparenzrichtlinie war ‘die Schaffung effizienter, integrierter und transparenter Wertpapiermärkte, die Anleger und Kapitalgeber besser über die Finanzlage kapitalmarktorientierter Unternehmen informieren’ (Henkel et al. (2008), S. 36). In der vorliegenden Arbeit werden in drei Studien spezielle Fragestellungen ausgehend von der gesetzlichen Entwicklung in Deutschland analysiert. Es werden die Zusammenhänge zwischen freiwilligen Kontrollen eines Wirtschaftsprüfers, staatlichem Enforcement, Prüfungskosten und Bilanzpolitik untersucht. Die erste Studie befasst sich mit der freiwilligen Kontrolle der Zwischenberichterstattung kapitalmarktorientierter Unternehmen. Die unterjährige Veröffentlichung von Zwischenberichten bietet entscheidungsrelevante und zeitnahe Informationen für Kapitalmarktakteure. Eine prüferische Durchsicht durch einen Wirtschaftsprüfer kann zusätzliches Vertrauen in die Berichterstattung liefern. Bei der Implementierung des TUG wurde eine pflichtmäßige prüferische Durchsicht von Zwischenberichten in Deutschland diskutiert. Der Gesetzgeber entschied sich gegen eine gesetzliche Verpflichtung und übertrug die Entscheidung einer freiwilligen unterjährigen Kontrolle an Unternehmen und Wirtschaftsprüfer. Dieser Marktlösung in Deutschland steht eine gesetzlich verpflichtete prüferische Durchsicht z.B. in den USA, Frankreich oder Australien gegenüber. Es stellt sich folglich die Frage nach Kosten und Nutzen einer solchen Kontrollleistung, um die Vorteilhaftigkeit der gesetzlichen Pflicht oder der Marktlösung zu bewerten. Diese erste Studie nutzt ausgehend vom TUG einen neu entstandenen, beobachtbaren Markt für prüferische Durchsichten in Deutschland. Die Kategorisierung der Prüfungskosten in ‚Abschlussprüfungskosten‘ und ‚Prüfungsnahen Dienstleistungen‘ ermöglicht eine detaillierte Untersuchung der Kosten für das Unternehmen. Weiter wird der Nutzen in Bezug auf die Qualität der unterjährigen Berichterstattung analysiert. In der zweiten Studie wird das Angebot und die Nachfrage von prüferischen Durchsichten beleuchtet. In der Literatur werden die Agency-Kosten, die Corporate Governance Struktur und verschiedene Kostentreiber dieser Prüfungsleistung als Einflussfaktoren identifiziert. Der positive Nachfrageschock bei prüferischen Durchsichten im Jahr 2007 lässt sich durch diese Faktoren jedoch nicht erklären. Ausgehend von der neu beobachtbaren Nachfrage stellt die Studie einen Zusammenhang zwischen dem erstmaligen Enforcement von Zwischenberichten durch die DPR und dem Inkrafttretens des TUG im Jahr 2007 her. Die gesetzlichen Änderungen werden dem theoretischen Rahmen von Angebot und Nachfrage freiwilliger externer Kontrollen zugeordnet. Im nächsten Schritt wird der Einfluss von Fehlerentdeckungsrisiken durch die DPR für Management und Aufsichtsrat auf die Nachfrage von externen Kontrollen untersucht. Die dritte Studie befasst sich mit der Effektivität des deutschen Enforcement-Systems, dem Einfluss von Bilanzpolitik und dessen Antizipation in den Prüfungskosten. Die Untersuchung analysiert den zeitlichen Aspekt von Bilanzpolitik auf Fehlerveröffentlichungen in späteren Perioden. Es besteht die Möglichkeit die Verschlechterung der wirtschaftlichen Situation eines Unternehmens durch Bilanzpolitik zu verdecken. Ohne Verbesserung der wirtschaftlichen Lage des Unternehmens führt dieses Verhalten zu einem Bilanzpolitikausmaß außerhalb des gesetzlichen Rahmens und folglich zu einer hohen Wahrscheinlichkeit der Fehlerentdeckung bei DPR Untersuchungen. Die Entwicklung der Bilanzpolitik eines solchen Unternehmens müsste im zweiten Schritt mit der Risikokomponente in den Prüfungskosten des Wirtschaftsprüfers in Verbindung stehen. Der risikoorientierte Prüfungsansatz und die Antizipation von Bilanzpolitik in den Prüfungskosten sollte demnach vor Fehlerbekanntmachung zu einem Anstieg der Prüfungskosten führen. Zusätzlich ist nach offizieller Fehlerveröffentlichung und somit durch eine objektiv beobachtbare Schwäche im Rechnungslegungssystem oder einem hohen Ausmaß an Bilanzpolitik ein Risikoaufschlag zu vermuten. Der letzte Abschnitt fasst die wichtigsten Aussagen der Dissertation zusammen und erläutert die Zusammenhänge der Ergebnisse. / The interim reporting process provides decision-useful information to investors and market participants. However the legal circumstances of external interim auditor reviews differ worldwide. A mandatory review rule in the US as opposed to a contrary decision of the German legislator raises the question of the cost-benefit-relation of auditor reviews. Using a German sample of 1,023 firm-year observations from 2007 to 2010, I extract the costs and the benefits of voluntary semi-annual reviews. The unique German legal environment makes it possible to split the cost effect of a review in the price effect (included in audit-related fees) and a possible reduction of audit fees resulting from an improved year-around audit process. I observe a significant increase of audit and audit-related fees of around 14.5% (total fee effect). Additionally, the study provides evidence on declining audit fees for reviewed firms as compared to a matched sample of non-reviewed firms. The effect of an interim review on quarterly earnings quality – using discretionary accruals as an earning management proxy – shows no significant influence. This study investigates the effect of the error announcement risk on the demand for voluntary interim auditor reviews. Material changes in the German legal environment in 2007 introduced an enforcement system for semi-annual financial reports. The demand for voluntary semi-annual reviews increased significantly from 0.8% in 2006 to 14.6% in 2007 and increased further to 19.5% until 2010 for a sample of 1,278 firm-year observations. This study addresses the question whether the enforcement structure and the resulting error announcement risk exposure have an influence on voluntary external monitoring. After controlling for agency costs, the corporate governance structure, and selected review cost factors, results of a logistic regression analysis show a positive influence of error announcement risk on the likelihood of engaging an auditor to review the semi-annual interim report. The findings contribute to the literature by demonstrating that the quality of the enforcement system and the risk of error findings influence the review decision of the board of directors positively. In 2004 German legislation established the Financial Reporting Enforcement Panel. In 147 cases since then, the panel has ordered the announcement of errors in previously disclosed and audited financial statements of German firms. We use this unique dataset to evaluate the consequences of increasing earnings management over time on enforcement releases and their recognition in audit fees. Ettredge et al. (2010) provide evidence on a phenomenon called ‘balance sheet bloat’ that is due to income increasing earnings management and later influences the disclosure of misstated financial statements. Thus, the evidence of earnings management recognition in audit fees (Abbott et al. 2006) and the hypothesis of future information content in fees by Stanley (2011) leads us to hypothesize that auditors recognize increasing audit risk in audit fees before the enforcement process starts. We extend related earnings management and audit fee literature by modeling the development of earnings management within the misstatement firms and systematically link it to auditor reactions. We find significant predictive power of different commonly used accrual measures for enforcement releases in the period prior and up to the misstatement period. In this period of time, we also observe an audit fee increase, e.g. the recognition of increased audit risk. We investigate an audit fee effect after the misstatement period but find no significant relation.

Whilst extensive research has been done on the association between corporate governance and firm performance, the empirical evidence is inconclusive. This thesis argues that the failure of past studies to establish a positive association between corporate governance and performance might be caused by the use of conservative accounting in firms. If firms with stronger corporate governance adopt more conservative accounting procedures, then tests of the relationship between corporate governance characteristics and performance will be biased downwards. If market participants fail to recognise a link between conservative accounting and corporate governance, then firms with stronger corporate governance might also be systematically undervalued. Therefore, studying the relationship between selected corporate governance attributes and the extent of conservative accounting does more than just extend our understanding of the link between governance characteristics and accounting quality. It also provides useful insights for interpreting the existing literature on the association between corporate governance and performance. In this thesis, detailed investigation is undertaken of the link between several governance characteristics (as well as an aggregate index) and the extent of conservatism evident in Australian firms?? financial reporting. Overall, the results provide only weak evidence that firms with certain governance characteristics report more conservatively. Evidence of any such link is restricted to measures of board composition and leadership, and even then the results are sensitive to the method used to measure the extent of conservatism in financial reporting. There is no systematic evidence of an association for measures of audit committee composition, nor board size. Finally, there is only weak evidence that use of a Big 5 auditor affects the extent of conservatism and the results are sensitive to the period investigated. These results are all robust to explicitly recognizing possible endogeneity between the extent of conservative accounting and the governance attributes examined. Overall, the results raise important questions about the extent to which widely advocated corporate governance attributes result in accounting outcomes which accelerate the revelation of relatively poor economic news, at least for Australian firms in the years examined (1998 and 2002). However, beyond the immediate relationship examined, the results also suggest that caution is appropriate before dismissing the absence of a link between governance attributes and firm performance as being attributable to accounting conservatism.

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In the context of transition, where the Chinese enterprises are seeking good models for the corporate governance, one Anglo-American corporate governance model, the agency model, seems to shed some light on enterprises that used to be privately-owned and have transformed into public corporations. Although the agency model might be a solution to the public corporations, it never the less fails to match the Chinese context in many respects. In light of the nature of the agency model and potential mismatches with the Chinese context, this thesis examines theoretical reasons that could account for the discrepancies between the two. It is argued that, despite the foreign nature of this model and the need for amendment, the Chinese public corporations are still be able to establish good corporate governance structure via it.

In the context of transition, where the Chinese enterprises are seeking good models for the corporate governance, one Anglo-American corporate governance model, the agency model, seems to shed some light on enterprises that used to be privately-owned and have transformed into public corporations. Although the agency model might be a solution to the public corporations, it never the less fails to match the Chinese context in many respects. In light of the nature of the agency model and potential mismatches with the Chinese context, this thesis examines theoretical reasons that could account for the discrepancies between the two. It is argued that, despite the foreign nature of this model and the need for amendment, the Chinese public corporations are still be able to establish good corporate governance structure via it.