Fraudulent financial reporting by
U.S. public companies often results
in bankruptcy or business failure,
according to a new study, and often results in significant immediate
losses for shareholders and penalties for executives.
The study, by the Committee of
Sponsoring Organizations of the
Treadway Commission, examined financial statement fraud allegations investigated by the U.S.
Securities and Exchange Commission over a 10-year period. The
study found that news of an alleged
fraud resulted in an immediate and
significant abnormal decline in the
stock price of the company.
Companies engaged in fraud
often experienced bankruptcy,
delisting from a stock exchange,
or an asset sale, and in nine out of
10 cases the SEC named the chief
executive or chief financial officer
for alleged involvement.
The study, “Fraudulent Financial Reporting: 1998-2007,” examines nearly 350 alleged accounting fraud cases investigated by the
SEC. It shows that financial fraud
affects companies of all sizes, with
the median company having assets
and revenues just under $100 million. The median fraud was $12.1
million. More than 30 of the fraud
cases each involved misstatements
or misappropriations of $500 million or more.
The SEC named the CEO and/
or CFO for involvement in 89 percent of the fraud cases. Within two
years of the completion of the SEC
investigation, about 20 percent of
CEOs/CFOs had been indicted.
Over 60 percent of those indicted
were convicted.
Revenue frauds accounted for
over 60 percent of the cases. Many
of the commonly observed board
of director and audit committee
characteristics such as size, meeting frequency, composition, and
experience do not differ meaningfully between fraud and no-fraud
companies. Recent corporate governance regulatory efforts appear
to have reduced variation in observable board-related governance
characteristics.
Twenty-six percent of the firms
engaged in fraud changed auditors
during the period examined, com-
pared to a 12 percent rate for no-
fraud firms. Initial news in the press
of an alleged fraud resulted in an av-
erage 16. 7 percent abnormal stock
price decline for the fraud company
COSO study: Financial fraud rarely ends well
ALTAMONTE SPRINGS, FLA.
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in the two days surrounding the an-
nouncement. News of an SEC or
Justice Department investigation
resulted in an average 7. 3 percent
abnormal stock price decline.
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