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

Author

Listed:
  • Jonathan Black
  • Maximiliano da Silva
  • Mattias Nilsson
  • Roberto Pinheiro

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.

Suggested Citation

  • Jonathan Black & Maximiliano da Silva & Mattias Nilsson & Roberto Pinheiro, 2016. "Information Production, Misconduct Effort, and the Duration of Financial Misrepresentation," Working Papers 16-13R, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:161301
    DOI: 10.26509/frbc-wp-201613r
    Note: This is a revision of Working Paper 16-13 "Information Production, Misconduct Effort, and the Duration of Corporate Fraud"
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    References listed on IDEAS

    as
    1. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Information production; Fraud duration; Auditing; hazard models; Fraud effort;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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