We examine the link between information produced by auditors and analysts and fraud duration. Using a hazard model, we analyze misstatement periods related to SEC accounting and auditing enforcement releases (AAERs) between 1982 and 2012. Our results suggest that a fraud is more likely to end just after firms announce an auditor switch or issue audited financial statements, particularly when the audit report contains explanatory language. Analyst following has a nuanced impact on fraud termination. While a small amount of analyst following is associated with shorter misstatement periods, the benefits of additional analyst coverage diminish as more analysts are added, possibly due to correlated information in their forecasts. We also find that misstatement periods are more likely to end in the quarter after an analyst decides to drop coverage, suggesting that this decision may inform whistleblowers. Finally, our results indicate that a fraud lasts longer when it is well planned, more complex, or involves more accrual manipulation. Taken together, our findings are consistent with auditors and analysts playing a key informational role in ending fraud, while managerial effort to conceal misconduct significantly extends its duration.
Information Production and the Duration of Accounting Fraud Available to Purchase
We thank Henrik Cronqvist, Robert Davidson, Henry L. Friedman, Irena Hutton, Jonathan Karpoff, Yrjo Koskinen, R. Mark Reesor, Nancy Su, Rodrigo Verdi, Simona Mola Yost, and audiences at the AAA Western Doctoral Student Interchange, the AAA 2015 FARS Midyear Meeting, the CFA-JCF-Schulich Conference on Financial Market Misconduct, the FMA 2014 Annual Meeting, the JLFA 2019 Conference, University of Colorado at Boulder, University of São Paulo, SEC, Copenhagen Business School, Fundação Getúlio Vargas (FGV-EESP), Purdue University, and University of Utah. We also thank Jerry Martin for graciously sharing his data on corporate fraud. All remaining errors are our own. The Securities and Exchange Commission disclaims responsibility for any private publication or statement by any SEC employee or commissioner. This article expresses the authors’ views and does not necessarily reflect the views of the Commission, the commissioners, or other members of the staff. The views in this article are those of the authors and do not necessarily reflect those of the Federal Reserve System or the Board of Governors.
Black J, Nilsson M, Pinheiro R, da Silva M (2021), "Information Production and the Duration of Accounting Fraud". Journal of Law, Finance and Accounting, Vol. 6 No. 2 pp. 263–314, doi: https://doi.org/10.1561/108.00000054
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