Information Production, Misconduct Effort, and the Duration of Financial Misrepresentation
85 Pages Posted: 24 Aug 2014 Last revised: 25 Jun 2018
Date Written: June 20, 2018
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: Suggested Citation