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

85 Pages Posted: 24 Aug 2014 Last revised: 25 Jun 2018

See all articles by Jonathan Black

Jonathan Black

Purdue University - Department of Accounting

Mattias Nilsson

U.S. Securities and Exchange Commission

Roberto Pinheiro

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Maximiliano Silva

Federal University of ABC

Date Written: June 20, 2018

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.

Keywords: Fraud duration; Information production; Fraud effort; Auditor reports; Hazard models

JEL Classification: G34; G38; K22; K42; L51; M41

Suggested Citation

Black, Jonathan and Nilsson, Mattias and Pinheiro, Roberto and Silva, Maximiliano, Information Production, Misconduct Effort, and the Duration of Financial Misrepresentation (June 20, 2018). Available at SSRN: https://ssrn.com/abstract=2485555 or http://dx.doi.org/10.2139/ssrn.2485555

Jonathan Black

Purdue University - Department of Accounting ( email )

Krannert School of Management
West Lafayette, IN 47907-1310
United States

Mattias Nilsson

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
100 F Street NE
Washington, DC 20549
United States

Roberto Pinheiro (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Maximiliano Silva

Federal University of ABC ( email )

Rua Arcturus - Jardim Antares
Delta Building, 3rd Floor, Room 304
São Bernardo do Campo - SP, São Paulo 09606-070
Brazil
+55 11 2320-6314 (Phone)

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