The Press as a Watchdog for Accounting Fraud

Abstract

This paper investigates the press' role as a watchdog for accounting fraud. In choosing whether to fulfill this role, the press must trade off the benefits of providing interesting stories, and thus increasing circulation, with the costs of identifying such stories and potentially alienating business partners and advertisers. I use a sample of firms that the SEC has found guilty of committing accounting fraud to investigate how the accesses these costs and benefits. I find the press is more likely to write an article identifying accounting fraud if the firm has a high information environment (i.e. many press articles in general, high analyst following and, although weaker results, a large market value of equity). A rich information environment indicates the press can obtain information at a lower cost and that a large number of potential readers would be interested in the firm. I also find that characteristics of the fraud impact the likelihood the press will write an article. Fraud that includes material publicly misleading statements or management misappropriation of funds is more likely to trigger an article. A public statement can both attract the presses attention, thus reducing identification cost, and assure more people are interested in a follow-up to information they have used. Management misappropriation of funds, whether theft or insider trading, is likely to make a story more interesting to the public, and thus increase the benefits to the writer. I do not find the severity of the violation, based on length and number of violations noted, to influence the likelihood of an article being written. Finally, I perform a content analysis of the identified fraud articles to gain a greater understanding of how the press undertakes the watchdog role. I find that the press relies on many sources, but particularly on analysts, legal suits and auditor changes. While many types of press break the initial story, the business press provides the greatest coverage. Finally, most articles do not appear to be written by local reporters, but those that do are more likely to provide no source for information (consistent with having performed their own investigative reporting) and are less likely to rely on analysts in general. This provides some evidence of an informational difference for locally based reporters.

Keywords: Accounting, fraud, press, media, information intermediary

JEL Classification: K40, L82, M41, M49, G29