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How pervasive is corporate fraud?

Author

Listed:
  • Alexander Dyck

    (University of Toronto)

  • Adair Morse

    (University of California at Berkeley
    NBER)

  • Luigi Zingales

    (NBER
    University of Chicago
    CEPR)

Abstract

We provide a lower-bound estimate of the undetected share of corporate fraud. To identify the hidden part of the “iceberg,” we exploit Arthur Andersen’s demise, which triggered added scrutiny on Arthur Andersen’s former clients and thereby increased the detection likelihood of preexisting frauds. Our evidence suggests that in normal times only one-third of corporate frauds are detected. We estimate that on average 10% of large publicly traded firms are committing securities fraud every year, with a 95% confidence interval of 7%-14%. Combining fraud pervasiveness with existing estimates of the costs of detected and undetected fraud, we estimate that corporate fraud destroys 1.6% of equity value each year, equal to $830 billion in 2021.

Suggested Citation

  • Alexander Dyck & Adair Morse & Luigi Zingales, 2024. "How pervasive is corporate fraud?," Review of Accounting Studies, Springer, vol. 29(1), pages 736-769, March.
    • Handle: RePEc:spr:reaccs:v:29:y:2024:i:1:d:10.1007_s11142-022-09738-5
    DOI: 10.1007/s11142-022-09738-5
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    More about this item

    Keywords

    Corporate governance; Corporate fraud; Detection likelihood; Cost–benefit analysis; Securities regulation; Arthur Andersen;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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