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Does financial reporting misconduct pay off even when discovered?

Author

Listed:
  • Dan Amiram

    (Tel Aviv University)

  • Serene Huang

    (Columbia Business School)

  • Shiva Rajgopal

    (Columbia Business School)

Abstract

Experts and popular belief contend that it pays to engage in financial misconduct. We hand-collect data on three subsamples of severe misconduct cases, between 2003 and 2016: a sample of 37 (100) SEC enforcement actions (class action lawsuits) that explicitly allege fraud and a sample of 100 restatements with the most negative stock price reaction in which investors presumably suspect fraud. We then compare estimates of the benefits from reporting misconduct to top managers against estimates of the costs of its discovery. We find that 32.9% of perpetrators experience an overall net benefit from discovered misconduct. The percentage of officers who benefit is highest for the restatement subsample (43.5%), followed by the class action lawsuit subsample (27.7%), and is the lowest for the SEC enforcement subsample (8.1%). Stated differently, if we assume that the probability of detection is 31%, as conjectured in the literature, more than half of the perpetrators in our sample would benefit from engaging in financial reporting misconduct. Hence our evidence suggests that financial reporting misconduct can pay off for perpetrators.

Suggested Citation

  • Dan Amiram & Serene Huang & Shiva Rajgopal, 2020. "Does financial reporting misconduct pay off even when discovered?," Review of Accounting Studies, Springer, vol. 25(3), pages 811-854, September.
    • Handle: RePEc:spr:reaccs:v:25:y:2020:i:3:d:10.1007_s11142-020-09548-7
    DOI: 10.1007/s11142-020-09548-7
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    References listed on IDEAS

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    1. Dan Amiram & Zahn Bozanic & James D. Cox & Quentin Dupont & Jonathan M. Karpoff & Richard Sloan, 2018. "Financial reporting fraud and other forms of misconduct: a multidisciplinary review of the literature," Review of Accounting Studies, Springer, vol. 23(2), pages 732-783, June.
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    4. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
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    6. Dirk Jenter & Fadi Kanaan, 2015. "CEO Turnover and Relative Performance Evaluation," Journal of Finance, American Finance Association, vol. 70(5), pages 2155-2184, October.
    7. Dichev, Ilia D. & Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2013. "Earnings quality: Evidence from the field," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 1-33.
    8. 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.
    9. Jonathan M. Karpoff & D. Scott Lee & Gerald S. Martin, 2014. "The Consequences to Managers for Financial Misrepresentation," Springer Books, in: Roberto Pietra & Stuart McLeay & Joshua Ronen (ed.), Accounting and Regulation, edition 127, chapter 0, pages 339-375, Springer.
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    Cited by:

    1. Raghunandan, Aneesh, 2021. "Financial misconduct and employee mistreatment: evidence from wage theft," LSE Research Online Documents on Economics 109863, London School of Economics and Political Science, LSE Library.
    2. Karol Marek Klimczak & Alejo José G. Sison & Maria Prats & Maximilian B. Torres, 2022. "How to Deter Financial Misconduct if Crime Pays?," Journal of Business Ethics, Springer, vol. 179(1), pages 205-222, August.
    3. Eugster, Nicolas & Kowalewski, Oskar & Śpiewanowski, Piotr, 2024. "Internal governance mechanisms and corporate misconduct," International Review of Financial Analysis, Elsevier, vol. 92(C).
    4. repec:ies:wpaper:f202208 is not listed on IDEAS
    5. Yunchuan Sun & Xiaoping Zeng & Ying Xu & Hong Yue & Xipu Yu, 2024. "An intelligent detecting model for financial frauds in Chinese A‐share market," Economics and Politics, Wiley Blackwell, vol. 36(2), pages 1110-1136, July.
    6. Amar, Moty & Chen, Ester & Gavious, Ilanit & Weihs, Hagit, 2022. "Financial reporting misconduct: Evidence from the field," Finance Research Letters, Elsevier, vol. 47(PA).
    7. Aneesh Raghunandan, 2021. "Financial misconduct and employee mistreatment: Evidence from wage theft," Review of Accounting Studies, Springer, vol. 26(3), pages 867-905, September.

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    More about this item

    Keywords

    Misconduct; Fraud; Misreporting; Penalty; Cost benefit; SEC; Restatements; Class action lawsuits;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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