Abstract—The present study investigates whether the distribution of power between two major internal corporate governance mechanisms: Chief Executive Officer (CEO) and Board of Directors (BOD) is associated with the likelihood of financial statement fraud in Indonesian Public Listed Companies (PLCs). We employ principal component analysis on number of characteristic of power related to CEO and BOD to acquire each of three factors that characterize types of power between these key corporate governance actors. Furthermore, we extend the study by analyzing the dyadic pairing of low and high CEO and BOD power relationships and how they influence the likelihood of financial statement fraud in an emerging market country setting. The overall findings suggest when the BOD expert power increases (and to some extent when the BOD ownership power decreases), the likelihood of financial statement fraud decreases through a consistent monitoring and supervising mechanism. The findings of this study underline the need of the proactive/participatory boards in a company setting to mitigate the likelihood of financial statement fraud. This study supports the calls for maximizing the role of BOD in Indonesian companies comprehensively.

Index Terms—corporate governance, CEO and BOD powers, likelihood of financial statement fraud, dyadic relationships

Cite: Andri Zainal, Muhammad Fitri Rahmadana, and Khairuddin Naim Bin Mohd Zain, "Power and Likelihood of Financial Statement Fraud: Evidence from Indonesia," Journal of Advanced Management Science, Vol. 1, No. 4, pp. 410-415, December 2013. doi: 10.12720/joams.1.4.410-415