Examining the Impact of the Relationship between Managerial Ability and Financial Statements Fraud: The Auditor’s Responsibility and the Moderating Role of Board Gender Diversity : An Empirical Evidence from the Egyptian Listed Companies

Purpose: This study aims to examine the relationship between managerial ability and the existence of financial statement fraud, considering the auditor's responsibility, while highlighting the impact of board gender diversity as a moderating variable for this relationship. Additionally, multiple levels of statistical analysis have been employed to interpret the examined study.
Design/Methodology: The study adopts the Data Envelopment Analysis (DEA) model proposed by Demirjian to measure managerial ability and utilizes the Beneish M-Score model to assess the likelihood of financial statement fraud. Board gender diversity is measured by the percentage of female representation on the board of directors.  Additionally, the study sample includes 75 companies listed on the Egyptian Stock Exchange during the period 2014–2023. The study's findings were derived using the Ordinary Least Squares (OLS) method and the Generalized Least Squares (GLS) method to address potential statistical measurement issues.
Results: The results indicate a statistically significant relationship between managerial ability and financial statement fraud, but this relationship is found to be nonlinear, taking the shape of a U-curve at both the overall sample level and among small-sized firms. However, a positive linear relationship exists between managerial ability and financial statement fraud for large-sized firms, suggesting that increased managerial ability in large firms enhances the likelihood of engaging in fraudulent financial reporting, unlike small-sized firms. Furthermore, the findings reveal that board gender diversity amplifies the positive relationship between managerial ability and fraudulent accounting practices.
 
Orginality/Value: Despite the extensive body of prior research on the impact of managerial ability on financial performance and various other dimensions, existing studies— to the best of the researcher’s knowledge— have not directly examined its relationship with financial statement fraud. This gap is particularly significant given the pressures exerted on auditors due to managerial influence during the audit process. Furthermore, while numerous studies have explored the significance of board diversity in enhancing transparency and corporate governance— especially with regard to female representation— most of these studies have not investigated, to the best of the researcher’s knowledge, how such qualitative board representation can moderate the relationship between managerial ability and financial statement fraud in the context of auditors’ responsibilities. This represents a critical research gap that warrants further investigation and contributes to the ongoing discourse in the field of accounting and financial reporting.