23: Corporate Fraud: Avenues for Future Research

Fraud is a complex phenomenon with harmful consequences. Corporate fraud occurs when an employee, a manager, or an executive commits fraud against an employer, leaving the organization to grapple with financial and reputational costs. One example of corporate fraud occurs when managers deceive investors or other key stakeholders about the firm's true performance or its financial health. Fortunately, academic research provides considerable insights and evidence about fraud including the most common motivations behind corporate fraud and its ripple effects.

Regulators and market authorities across the world have attempted to implement strict deterrents to fraud by prescribing severe punishments for those engaging in it. However, despite robust regulation and sophisticated antifraud mechanisms, corporate fraud persists. Organizations lose about 5 percent of their revenues annually as a result of fraud (Association of Certified Fraud Examiners 2018), and fraud can tarnish their reputations and brand. Corporate fraud can also erode trust in the organization. Several studies report that share values decrease for corporations upon news of the possibility of fraud. For example, Karpoff, Lee, and Martin (2008) suggest that one-day average abnormal returns for corporations that are subject to a Securities and Exchange Commission (SEC) enforcement action for a financial misrepresentation is −25.2 percent.