The effect of demographic diversity in top management team and in board of directors on fraudulent financial reporting

Abstract

This study examined how demographic diversity present in the top management team and in the board of directors may influence the likelihood of a firms fraudulent financial reporting. It also evaluated board demography with respect to top management team demography to detect whether demographic dissimilarity between the two groups can enhance monitoring effectiveness, resulting in lower likelihood of fraudulent financial reporting. Data from the top management teams and boards of directors of 90 firms – 30 firms accused of financial statement fraud and 60 matched firms – revealed a strong negative relationship between the likelihood of fraud and top management team diversity and board diversity, measured by variances in age, tenure, gender, functional background, and educational background.