American Accounting Association 2006 Midwest Region Meeting March 30 – April 1 Chicago, Illinois

Friday, March 31, 4:00 p.m. to 5:40 p.m.
Concurrent session 4D - Corporate Governance and Fraud (Auditing)

Title: An Examination of Firms Charged with Medicare and Medicaid Fraud: Does Corporate Governance Matter?

Susan E. Cammack Washburn University

ABSTRACT: Prior research provides evidence that firms charged with financial reporting fraud have relatively weak corporate governance. According to the theory of the firm, effective corporate governance monitors management in order to detect and prevent activities, such as fraud, that conflict with the best interests of the firm and its owners. This paper compares a sample of fifty-three unique health care firms charged with committing Medicare and/or Medicaid fraud with a control sample of firms in the same industry segments that were not charged with government health care program fraud. Governance mechanisms related to the strength of the Board of Directors, audit committee, stock ownership, and auditor are evaluated.

Univariate and logistic regressions are employed to compare several aspects of corporate governance. The results support the general hypothesis that, as a whole, corporate governance is weaker in the fraud firms than in the no-fraud firms. Specifically, the fraud firms have fewer outside directors and those directors sit on more boards. Directors and institutions own less stock in fraud firms. The fraud firms change auditors more often and engage industry specialist audit firms less often. These are all indications of weaker corporate governance. The results reported here are consistent with prior research, even though the type of fraud is different. The sample of fraud firms is different than the AAER firms studied in prior research in many ways. For example, the fraud firms examined are much larger. Most fraud firms were listed on major stock exchanges and all were audited by a Big 5/6/8 accounting firm. Despite these differences, the same general result is obtained, that is, firms charged with fraud have relatively weak corporate governance.

Abuse of the Medicare and Medicaid programs negatively impacts the abusing firms and other health care providers, taxpayers, beneficiaries, and can influence the future of government insurance programs, as well as the health care system in general. The resources that are wasted and misappropriated in government health insurance programs are not available for other purposes. The finding that Medicare/Medicaid fraud firms have weaker corporate governance is potentially useful to investors in health care firms and the government agencies and auditors that monitor those firms. The study also makes contributions to the important public debate about corporate misbehavior and ethics.

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