56 Pages Posted: 24 Feb 2013
Date Written: February 22, 2013
We estimate what percentage of firms engage in fraud and the economic cost of fraud. Our estimates are based on detected frauds, and frauds that we infer are started but are not caught. To identify the ‘iceberg’ of undetected fraud we take advantage of an exogenous shock to the incentives for fraud detection: Arthur Andersen’s demise, which forces companies to change auditors. By assuming that the new auditor will clean house, and examining the change in fraud detection by new auditors, we infer that the probability of a company engaging in a fraud in any given year is 14.5%. We validate the magnitude of this estimate using alternative methods. We estimate that on average corporate fraud costs investors 22 percent of enterprise value in fraud-committing firms and 3 percent of enterprise value across all firms.
Keywords: corporate fraud, governance, detection
JEL Classification: G34, K22, G38
Suggested Citation: Suggested Citation
Dyck, I. J. Alexander and Morse, Adair and Zingales, Luigi, How Pervasive is Corporate Fraud? (February 22, 2013). Rotman School of Management Working Paper No. 2222608. Available at SSRN: https://ssrn.com/abstract=2222608 or http://dx.doi.org/10.2139/ssrn.2222608
By Ray Ball