Managerial ability, Political Connections and Fraudulent Financial Reporting

Manager's efficiency in using corporate resources is reflected in the information presented in the financial statements.  Manager's ability can reduce fraudulent financial reporting by fulfilling stakeholders expectations and improving firm's performance. On the other hand, political connections not only affect firms financial situation, but also it can affect manager's incentives and abilities in preparation of the financial statement and lead to significant difference in the quality of financial reporting. Thus, the purpose of the present research is to examine the association between managerial ability and fraudulent financial reporting, and also to investigate the moderating effect of political connections on this relationship. To achieve the study objectives, 129 firms listed in the Tehran Stock Exchange were selected and studied for the period of 2011 to 2017. A panel data approach was used to test the hypotheses of research. Research’s findings show that there is a negative and significant association between managerial ability and the fraudulent financial reporting. In addition, the findings show that firms' political connections with the government do not weaken or limit the impact of managerial ability to reduce fraud in financial reporting. The results show that more able managers are knowledgeable about their business and can therefore make effective judgments and estimates, they can better transform firm resources and achieve better business performance and thus reduce fraud in financial reporting. In addition, the results show that the effectiveness of managerial ability to reduce financial reporting fraud is not affected by the firms' political connections with the government