Does the form of state ownership and political connections influence the incidence of financial statement fraud?

Does state ownership, the form of control by local and central government and political connections affect financial statement fraud? Our study provides new evidence on the role of these factors on fraud commission and detection for Chinese listed firms between 2007 and 2018. Using a bivariate probit model, developed to address partial observability concerns, we report state ownership lowers the likelihood of fraud detection, while increasing firms’ propensity to commit fraud. SOEs controlled by local government are more likely to engage in fraud and escape regulatory punishments, relative to SOEs controlled by central government. We discover that state ownership appears to encourage fraud commission and political connections are a constraint on regulatory punishments. This influence of state ownership on fraud is only significant for local SOEs without political connections. Our study contributes evidence on how government ownership forms and connections affect the occurrence of fraud, whilst considering partial observability concerns.