How pervasive is corporate fraud?
Dyck, Alexander; Morse, Adair; Zingales, Luigi
2023
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Abstract

We provide a lower-bound estimate of the undetected share of corporate fraud. To identify the hidden part of the “iceberg,” we exploit Arthur Andersen’s demise, which triggered added scrutiny on Arthur Andersen’s former clients and thereby increased the detection likelihood of preexisting frauds. Our evidence suggests that in normal times only one-third of corporate frauds are detected. We estimate that on average 10% of large publicly traded firms are committing securities fraud every year, with a 95% confidence interval of 7%-14%. Combining fraud pervasiveness with existing estimates of the costs of detected and undetected fraud, we estimate that corporate fraud destroys 1.6% of equity value each year, equal to $830 billion in 2021.

Details

Title
How pervasive is corporate fraud?
Author
Dyck, Alexander : University of Toronto
Morse, Adair : University of California, Berkeley
Zingales, Luigi : University of Chicago
Content Type
Article
Published in
Review of Accounting Studies
Keywords
Identifier(s)
DOI: https://doi.org/10.1007/s11142-022-09738-5
Data availability statement
The article uses four different measures of fraud. Financial misrepresentations exposed by auditors are identified by Dyck et al. (2010) derived from data collected from the Stanford Securities Class Action Clearinghouse [https://securities.stanford.edu/]. A summary of cases and whistleblowers identified by Dyck et al. (2010) is available here [https://docs.google.com/spreadsheets/d/1e-1fNFIjJC4yHvNLCE1rFy-JZFvbfPHW/edit?usp=share_link&ouid=112993024848888180836&rtpof=true&sd=true]. SEC section 10b-5 securities fraud cases are identified by Kempf and Spalt (2022), and derived from data collected from the Stanford Securities Class Action Clearinghouse [https://securities.stanford.edu/]. Restatements are based on data from the Audit Analytics database. Financial Misrepresentations that led to an Accounting and Auditing Enforcement Release are identified by Dechow et al. (2011) based on original data from the SEC website [http://www.sec.gov/divisions/enforce/friactions.shtml] and their updated dataset is available here [https://sites.google.com/usc.edu/aaerdataset/home].
Funding Information
University of Toronto, Connaught Fund
University of Chicago, Center for Research on Security Prices
University of Chicago, Stigler Center
University of Chicago, Initiative on Global Financial Markets
Publication Date
2023-01-05
Language
English
Copyright Statement

© The Author(s) 2023

This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.

Licensing
Record Appears in
Booth School of Business > Entrepreneurship
Booth School of Business > Finance
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Record Created
2023-05-25

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