Does financial reporting misconduct pay off even when discovered?

Dan Amiram (), Serene Huang () and Shiva Rajgopal ()
Additional contact information
Dan Amiram: Tel Aviv University
Serene Huang: Columbia Business School
Shiva Rajgopal: Columbia Business School

Review of Accounting Studies, 2020, vol. 25, issue 3, No 1, 854 pages

Abstract: 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.

Keywords: Misconduct; Fraud; Misreporting; Penalty; Cost benefit; SEC; Restatements; Class action lawsuits (search for similar items in EconPapers)
JEL-codes: G14 M40 M41 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s11142-020-09548-7

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