Published January 5, 2023
| Version v1
Journal article
Open
How pervasive is corporate fraud?
- 1. University of Toronto
- 2. University of California, Berkeley
- 3. University of Chicago
Description
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.
Data availability
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].Files
How-pervasive-is-corporate-fraud.pdf
Files
(1.4 MB)
| Name | Size | Download all |
|---|---|---|
|
md5:bc47d0d9b18cb67ed63fcf32ed3d954b
|
20.5 kB | Download |
|
Article md5:6e96a358996d14a3cc8a4ed5377d1fd3 |
1.4 MB | Preview Download |
Additional details
Identifiers
- DOI
- 10.1007/s11142-022-09738-5
- Other
- oai:uchicago.tind.io:6153
Funding
- 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