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Fraudulent financial reporting and the consequences for employees

Author

Listed:
  • Choi, Jung Ho
  • Gipper, Brandon

Abstract

We combine U.S. Census data with SEC enforcement actions to examine employees' outcomes, such as wages and turnover, before, during, and after periods of fraudulent financial reporting. We find that fraud firms’ employees lose about 50% of cumulative annual wages, compared to a matched sample, and the separation rate is much higher after fraud periods. Yet, employment growth at fraud firms is positive during fraud periods; these firms overbuild and hire new, lower-paid employees concurrent with the fraud, unlike firms in distress which tend to contract. When the fraud is revealed, firms shed workers, unwinding this abnormal growth and resulting in most of the negative wage consequences. Wage outcomes are particularly unfavorable in thin labor markets, and lower-wage employees, though unlikely to have perpetrated the fraud, experience more severe wage losses compared to higher-wage employees.

Suggested Citation

  • Choi, Jung Ho & Gipper, Brandon, 2024. "Fraudulent financial reporting and the consequences for employees," Journal of Accounting and Economics, Elsevier, vol. 78(1).
    • Handle: RePEc:eee:jaecon:v:78:y:2024:i:1:s016541012400003x
    DOI: 10.1016/j.jacceco.2024.101673
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    More about this item

    Keywords

    Wages; Employment growth; Accounting fraud; Information asymmetry;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

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