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Information Production, Misconduct Effort, and the Duration of Financial Misrepresentation
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.
AUTHORS: da Silva, Maximiliano; Pinheiro, Roberto; Nilsson, Mattias; Black, Jonathan
Information Production, Misconduct Effort, and the Duration of Corporate Fraud
We develop and test a model linking the duration of financial fraud to information produced by auditors and analysts and efforts by managers to conceal the fraud. Our empirical results suggest fraud termination is more likely in the quarter following the release of audited financial statements, especially when reports contain explanatory language, indicating auditors? observable signals reduce fraud duration. Analyst attention increases the likelihood of fraud termination, but the marginal effect beyond the first analyst is negative, possibly due to free riding and herding behavior impairing analysts? ability to illuminate misconduct. Finally, evidence suggests managerial concealment significantly increases fraud duration.
AUTHORS: Nilsson, Mattias; Black, Jonathan; da Silva, Maximiliano; Pinheiro, Roberto