Working Paper

Information Production, Misconduct Effort, and the Duration of Financial Misrepresentation

Abstract: 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. Results suggest that misconduct 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 increases the fraud termination hazard. However, increases (decreases) in analyst coverage have a negative (positive) marginal impact on the termination hazard, suggesting that analysts signal whistleblowers with their choice to add or drop coverage. Finally, our results suggest that misconduct 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 fraud detection, while managerial effort to conceal misconduct significantly extends its duration.

Keywords: Information production; Fraud duration; Auditing; hazard models; Fraud effort;

JEL Classification: G34; G38; K22; K42; L51; M41;

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2016-06-01

Number: 16-13R

Note: This is a revision of Working Paper 16-13 "Information Production, Misconduct Effort, and the Duration of Corporate Fraud"