Regulatory enforcement and the effectiveness of fraud training: A European investigation into earnings manipulation

This paper investigates whether the presence of fraud training constrains financial statement manipulation and whether the level of regulatory enforcement of countries (measured as both law enforcement and financial reporting practice enforcement) also plays a role. The evidence from a sample of 500 unique companies listed in the five largest European countries (i.e., France, Germany, Italy, Spain, and the UK), data from 2009 to 2014 and multivariate analyses with controls for endogeneity reveals that the implementation of fraud training does reduce earnings manipulation. In addition, it indicates that fraud training increases its effectiveness in countries with weaker regulatory enforcement, thus compensating for country-level institutional deficiencies. These results highlight that the additional resources invested by companies in ethics training generate benefits in terms of reduced earnings management and encourage managers of firms located in countries with weaker institutions to implement such measures because, in these contexts, their effectiveness is amplified.