Does financial reporting misconduct pay off even when discovered?

Dan Amiram, Serene Huang, Shiva Rajgopal*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish
Pages (from-to)811-854
Number of pages44
JournalReview of Accounting Studies
Volume25
Issue number3
DOIs
StatePublished - 1 Sep 2020

Funding

FundersFunder number
Ben Gurion University
Bernstein Center at Columbia Business School and Columbia Business School
Coller Fund
Columbia Business School
Fabrizio Ferri
Henry Crown Institute for Business Research in Israel
London School of Economics, Hong Kong Polytechnic University
Securities and Exchange Commission
George Mason University
Lancaster University
University of Hong Kong
Hong Kong University of Science and Technology
Università Bocconi

    Keywords

    • Class action lawsuits
    • Cost benefit
    • Fraud
    • Misconduct
    • Misreporting
    • Penalty
    • Restatements
    • SEC

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