The causes and consequences of accounting fraud

This file is part of IDEAS, which uses RePEc data

The causes and consequences of accounting fraud

Author Info

Mason Gerety (Department of Finance, Northern Arizona University, Flagstaff, AZ USA)
Kenneth Lehn (Katz School of Business, University of Pittsburgh, Pittsburgh, PA USA)

Abstract

One of the fundamental purposes of corporate accounting is to facilitate the monitoring of managers. Since managers are instrumental in the production of accounting numbers, and since it is costly to monitor their behavior in this regard, firms sometimes report fraudulent accounting numbers. This paper tests several hypotheses concerning why some firms, and not others, commit accounting fraud. This is accomplished through examination of a sample of 62 firms charged with disclosure violations by the Securities and Exchange Commission (SEC) during the period 1981-1987. We also examine whether directors of companies that commit accounting fraud are disciplined in the managerial labor market.

We adopt the perspective that the decision to commit fraud is governed by the expected costs and benefits of this behavior (This approach to the study of fraud has been used elsewhere, e.g. Darby and Karni (1973); Michael R. Darby and Edi Karni, “Free Competition and the Optimal Amount of Fraud”, Journal of Law and Economics 16 (April 1973), 68-88. For a brief discussion of the economics of fraud, see Edi Karni (1989) “Fraud” in The New Palgrave: Allocation, Information, and Markets, edited by John Earwell, Murray Milgate, and Peter Newman, New York: W.W. Norton, 117-119). Accordingly, a theory of accounting fraud requires an understanding of how these costs and benefits vary across firms. Those costs and benefits can be varied by external forces, through institutions such as equity markets and independent auditors, or internally through the design of monitoring and reward systems. We will divide our attention between the external and internal forces that change the costs and benefits of accounting fraud. © 1997 John Wiley & Sons, Ltd.

Download Info
To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 18 (1997)
Issue (Month): 7-8 ()
Pages: 587-599
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:wly:mgtdec:v:18:y:1997:i:7-8:p:587-599

Contact details of provider:
Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

For technical questions regarding this item, or to correct its listing, contact: (Christopher F. Baum).

Related research
Keywords:

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

J. Mulherin, 2005. "Corporations, collective action and corporate governance: One size does not fit all," Public Choice, Springer, vol. 124(1), pages 179-204, July. [Downloadable!] (restricted)

Statistics

Access and download statistics

Did you know? You can include your works in the database easily by uploading them on the Munich Personal RePEc Archive (MPRA) if you do not have access to an institutional RePEc archive.

This page was last updated on 2009-12-30.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.