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How Common Are Intentional GAAP Violations? Estimates from a Dynamic Model

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  • ANASTASIA A. ZAKOLYUKINA

Abstract

This paper uses data on detected misstatements—earnings restatements—and a dynamic model to estimate the extent of undetected misstatements that violate GAAP. The model features a CEO who can manipulate his firm's stock price by misstating earnings. I find the CEO's expected cost of misleading investors is low. The probability of detection over a five‐year horizon is 13.91%, and the average misstatement, if detected, results in an 8.53% loss in the CEO's retirement wealth. The low expected cost implies a high fraction of CEOs who misstate earnings at least once at 60%, with 2%–22% of CEOs starting to misstate earnings in each year 2003–2010, inflation in stock prices across CEOs who misstate earnings at 2.02%, and inflation in stock prices across all CEOs at 0.77%. Wealthier CEOs manipulate less, and the average misstatement is larger in smaller firms.

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  • Anastasia A. Zakolyukina, 2018. "How Common Are Intentional GAAP Violations? Estimates from a Dynamic Model," Journal of Accounting Research, Wiley Blackwell, vol. 56(1), pages 5-44, March.
    • Handle: RePEc:bla:joares:v:56:y:2018:i:1:p:5-44
    DOI: 10.1111/1475-679X.12190
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    10. Leonidas Enrique de la Rosa & Nikolaj Kirkeby Niebuhr, 2019. "Loss aversion and the zero-earnings discontinuity," Economics Working Papers 2019-09, Department of Economics and Business Economics, Aarhus University.
    11. Stephen J. Terry, 2023. "The Macro Impact of Short‐Termism," Econometrica, Econometric Society, vol. 91(5), pages 1881-1912, September.
    12. Ashton, John & Burnett, Tim & Diaz-Rainey, Ivan & Ormosi, Peter, 2021. "Known unknowns: How much financial misconduct is detected and deterred?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
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