Material accounting misstatements: Do managerial overconfidence, financial distress, and corporate governance practices matter?

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Abstract

This study examined factors related to the occurrence of material accounting misstatements in Malaysian public listed companies (PLCs). Two factors, motivation and opportunity, were assessed in this study. According to Jensen (1993), as the consequences of material accounting misstatement can be extremely detrimental to the firms and their employees, the occurrence of such affairs must be driven by strong motivation and a great opportunity. The motivation factors consist of managerial overconfidence and financial distress, while the opportunity factors include internal and external corporate governance practices. A total of 103 misstatement and 103 non-misstatement firms, gathered from 2010 to 2018, were examined. Univariate and binary logistic regression analyses were deployed to test the hypotheses. Evidently, highly financial distress, a higher proportion of board independence, the practice of CEO duality, and a larger size of borrowings exerted a significantly positive relationship with material accounting misstatements. Interestingly, a higher proportion of independent board members encouraged the likelihood of material accounting misstatements instead of mitigating such mishaps. This study provides insights to regulators on the efficacy of corporate governance practices in curbing material accounting misstatements. The study addresses the element of managerial overconfidence, which was previously limited to studies on capital structure and leverage decisions.

Keywords: Accounting, Accounting Misstatement, Financial Distress, Corporate Governance, External Audit, Malaysia

Authors’ individual contribution: Conceptualization — S.H.; Methodology — N.A.N.A. and S.H.; Formal Analysis — N.A.N.A.; Writing — Original Draft — N.A.N.A. and S.H.; Writing — Review & Editing — A.R.M.H. and S.H.; Supervision — S.H., Z.M.S., and A.A.S.A.-D.; Project Administration — A.R.M.H. and S.H.; Funding Acquisition — S.H., Z.M.S., and A.A.S.A.-D.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

Acknowledgements: The Authors would like to express their gratitude to the Research Management Centre, Universiti Teknologi MARA for funding the research project through the Strategic Research Partnership Grant (100-RMC 5/3/SRP (080/2021) and the Faculty of Accountancy, Universiti Teknologi MARA for facilitating this research project.

JEL Classification: M40, M41, M42

Received: 12.03.2022
Accepted: 07.11.2022
Published online: 08.11.2022

How to cite this paper: Nor Azhari, N. A., Hasnan, S., Mohd Sanusi, Z., Mohamed Hussain, A. R., & Al-Dhubaibi, A. A. S. (2022). Material accounting misstatements: Do managerial overconfidence, financial distress, and corporate governance practices matter? [Special issue]. Corporate & Business Strategy Review, 3(2), 198–210. https://doi.org/10.22495/cbsrv3i2siart1