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Federal Reserve Bank of Cleveland
Working Papers (New Series)
Information Production, Misconduct Effort, and the Duration of Financial Misrepresentation
Jonathan Black
Mattias Nilsson
Roberto Pinheiro
Maximiliano da Silva
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.


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Jonathan Black & Mattias Nilsson & Roberto Pinheiro & Maximiliano da Silva, Information Production, Misconduct Effort, and the Duration of Financial Misrepresentation, Federal Reserve Bank of Cleveland, Working Papers (New Series) 161301, 01 Jun 2016, revised 27 Jun 2018.
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Note: This is a revision of Working Paper 16-13 "Information Production, Misconduct Effort, and the Duration of Corporate Fraud"
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Subject headings:
Keywords: Fraud duration; Information production; Fraud effort; Auditing; Hazard models
DOI: 10.26509/frbc-wp-201613r
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