Forensic Accounting Techniques and Corporate Governance Effectiveness: Evidence from Emerging Market Firms

Abstract

This study investigates the relationship between forensic accounting techniques and corporate governance effectiveness in emerging market firms, with particular emphasis on the mediating role of fraud risk reduction. In emerging economies, weak regulatory enforcement, ownership concentration, and institutional gaps often heighten the risk of financial misreporting and governance failure. Against this backdrop, forensic accounting has emerged as a strategic monitoring mechanism capable of enhancing transparency and strengthening internal control systems. Using a balanced panel dataset of 1,250 firm-year observations, the study applies fixed effects, random effects, and dynamic panel Generalized Method of Moments (GMM) estimation to address potential endogeneity concerns. Corporate governance effectiveness is measured through a composite governance index, while forensic accounting adoption is captured using an aggregated index of investigative and monitoring practices. Fraud risk is proxied through financial reporting risk indicators derived from discretionary accruals and manipulation detection models. The findings indicate that forensic accounting techniques significantly improve corporate governance effectiveness and reduce fraud risk. Mediation analysis further reveals that fraud risk reduction partially mediates the relationship between forensic accounting adoption and governance outcomes, suggesting both direct and indirect governance benefits. The results remain robust across alternative specifications. The study contributes to the governance and forensic accounting literature by providing dynamic panel evidence from emerging markets and offers practical insights for regulators, boards, and policymakers seeking to enhance financial transparency and ethical compliance.