Corporate fraud study Flashcards
What is the main question the paper seeks to answer?
How pervasive is corporate fraud among large U.S. public firms?
What triggered the natural experiment used in the study?
The 2001 collapse of Arthur Andersen, which led to increased scrutiny of its former clients.
What does the study use as a proxy to estimate hidden fraud?
Increased fraud detection rates among former Arthur Andersen clients after its demise.
What percentage of corporate fraud is estimated to be detected?
Approximately 33% (one-third).
What percentage of large public firms commit securities fraud annually?
Around 10%, with a 95% confidence interval of 7% to 14%.
What is the estimated annual cost of corporate fraud as a percentage of equity value?
1.6% of total equity value.
How much did corporate fraud cost U.S. public firms in 2021?
$830 billion.
What are the four main data sources used to detect fraud?
Auditor-detected frauds, AAERs, financial restatements, and SEC Rule 10b-5 securities fraud cases.
What are AAERs?
Accounting and Auditing Enforcement Releases issued by the SEC in cases of accounting or auditing misconduct.
Why is intent hard to prove in fraud cases?
Because most fraud cases are settled out of court and intent can only be legally confirmed by a court verdict.
What does SEC Rule 10b-5 prohibit?
Material misstatements or omissions in connection with the purchase or sale of securities.
Why are class action lawsuits used in the fraud dataset?
They mobilize legal monitoring and often involve large firms with significant stakes.
What detection rate is associated with AAERs?
0.52
What is the detection rate for auditor-detected securities fraud?
0.29
What detection rate is found for accounting restatements?
0.34
What is the detection rate for general securities fraud?
0.47
How is ‘corporate fraud’ broadly defined in the paper?
As misrepresentation, materiality, and intent; typically includes alleged fraud settled out of court.
Why is the SEC’s dataset of AAERs considered limited?
Because the SEC lacks resources to pursue all fraud cases and doesn’t publish all actions.
What is the benefit of using a natural experiment in this study?
It avoids biases of statistical models and reflects real-world shifts in scrutiny.
What level of fraud in financial reports was found annually, excluding clerical errors?
41% of companies misrepresent their financials.
How do undetected frauds cause harm?
They lead to long-term value destruction, estimated at 11% of firm value.
What is the average drop in firm value when fraud is detected?
0.25
What percentage of 10b-5 violations involve omissions related to legal violations?
0.35
What condition must be met for SOX (Sarbanes-Oxley) to be cost-effective?
It must reduce the probability of fraud initiation by just 1 percentage point.
