Information Production and the Duration of Accounting Fraud

We examine the link between information produced by auditors and analysts and fraud duration. Using a hazard model, we analyze misstatement periods related to SEC accounting and auditing enforcement releases (AAERs) between 1982 and 2012. Our results suggest that a fraud is more likely to end just after firms announce an auditor switch or issue audited financial statements, particularly when the audit report contains explanatory language. Analyst following has a nuanced impact on fraud termination. While a small amount of analyst following is associated with shorter misstatement periods, the benefits of additional analyst coverage diminish as more analysts are added, possibly due to correlated information in their forecasts. We also find that misstatement periods are more likely to end in the quarter after an analyst decides to drop coverage, suggesting that this decision may inform whistleblowers. Finally, our results indicate that a fraud lasts longer when it is well planned, more complex, or involves more accrual manipulation. Taken together, our findings are consistent with auditors and analysts playing a key informational role in ending fraud, while managerial effort to conceal misconduct significantly extends its duration.