How to Select Targets for Investigations? Evidence from Financial Reporting Enforcement

52 Pages Posted: 9 May 2024 Last revised: 20 May 2024

See all articles by Marius Gros

Marius Gros

Niederrhein University of Applied Sciences; Goethe University Frankfurt - Department of Accounting and Auditing

Martin Nienhaus

Ruhr University of Bochum

Christopher Oehler

Ruhr-University Bochum

Alicia Schott

Ruhr University Bochum

Date Written: April 22, 2024

Abstract

We analyze the consequences of different selection mechanisms in financial reporting enforcement. Using a proprietary dataset of German enforcement investigations, we find that risk-based selection uncovers only 4% of all misreporting cases in the population. We cannot improve this detection rate using latest advances in machine learning---suggesting that it is generally difficult to identify risk indicators of misreporting. While less efficient than risk-based selection, random selection increases the overall detection rate at modest firm-level and regulatory costs. Moreover, investigations of compliant firms reinforce the ex-ante deterrence effect of enforcement by lowering the likelihood of future misreporting. Collectively, our results imply that random selection can be a low-cost option to complement and strengthen enforcement regimes.

Keywords: Enforcement, Selection Mechanism, Financial Reporting

JEL Classification: G14, G18, G38, K22, K42, M41

Suggested Citation

Gros, Marius F. and Nienhaus, Martin and Oehler, Christopher and Schott, Alicia, How to Select Targets for Investigations? Evidence from Financial Reporting Enforcement (April 22, 2024). Available at SSRN: https://ssrn.com/abstract=4803280

Marius F. Gros

Niederrhein University of Applied Sciences ( email )

Germany

Goethe University Frankfurt - Department of Accounting and Auditing ( email )

Theodor-W.-Adorno-Platz 1
60323 Frankfurt
Germany

Martin Nienhaus (Contact Author)

Ruhr University of Bochum ( email )

Universitätsstraße 150
Bochum, 44801
Germany

Christopher Oehler

Ruhr-University Bochum ( email )

Bochum
Germany

Alicia Schott

Ruhr University Bochum ( email )

Bochum
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
16
Abstract Views
165
PlumX Metrics