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ze and based on the international Big 5) do not deter corporate fraud any
more than other auditors.Corporate fraud is an unwelcome accompaniment to China’s modern enterprise reforms and
the China Securities Regulatory Commission is empowered to investigate and penalize fraud.The make-up of the board of directors is important in monitoring top management. Increasingthe proportion of outside directors will help deter fraud and investors should factor this into their
investment decisions. The CSRC’s recent move to require more outside directors is a move inthe right direction.

Acknowledgements

We thank Jeffry Netter (the editor) and an anonymous referee for their helpful comments andsuggestions. We also thank Jenice Prather-Kinsey (the discussant) and seminar participants at the
2005 AAA meeting for providing constructive feedback. Daniel Gao acknowledges financialsupport from a post-doctoral fellowship at the Hong Kong Polytechnic University, Chen andFirth acknowledge financial support from the Hong Kong Polytechnic University, and Rui
acknowledges support from the APIB Fund at the Chinese University of Hong Kong.

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The particular concern of our research is whether the ownership and governance
characteristics of firms play a role in the propensity to commit fraud. We use both univariate
analyses and bivariate probit models with partial observability to test our hypotheses. Based on
our multivariate results we find that boardroom characteristics are a factor in explaining fraud
while ownership patterns appear to be unimportant. Increasing the proportion of outsiders on the
board is one way to reduce fraud. Outsiders monitor management (including the executive
directors) and help deter fraud. The fact that firms that commit frauds have more board meetings
suggests the directors realize some acts or decisions are borderline legal and so there is more
debate about them resulting in more meetings. Chairmen with shorter tenure appear less able to
deter fraud.
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