There have been, and continue to be, serious financial scandals involving accounting
irregularities in leading companies. While responses to these occurrences include the
introduction of tougher regulations such as the Sarbanes-Oxley Act of 2002 (SOX),
further serious instances have occurred, notably the 2008 subprime mortgage and
financial institution meltdown. The existence and persistence of such cases of
financial scandals have led many investors, regulators, companies and academics to
try to reduce such incidence by improving the effectiveness of corporate governance
and increasing awareness of the red flags which could cause accounting scandals.
The relationship between individual corporate governance dimensions and corporate
governance as a system orientated toward accounting irregularities has been tested.
However, empirical measurements and tests are limited and largely based in one-tier
board system environments. The outcomes are almost impossible to apply in two-tier
board systems, where relationships between governance mechanisms and accounting
irregularities are not fully understood. Using the agency theory and fraud theories, this
research is undertaken in Indonesia to provide insights that extend the body of
knowledge about the practices of the two-tier board system. This study investigates
the extent to which the Indonesian corporate governance system acts as an effective
tool in protecting financial statement users against accounting irregularities.