How Pervasive is Corporate Fraud?
Posted: 1 Jul 2007
Date Written: May 1, 2007
After building a dataset of all corporate frauds in large corporations that impact shareholder value and are caught, we infer the unconditional probability that a fraud is committed whether or not it is subsequently caught. Our identification comes from observing situations in which the incentives for fraud detection are high. We estimate that 7% of firms commit fraud every year. We arrive at a very similar figure when we look at the increased probability of a fraud being revealed following the forced turnover of external auditors after the demise of Arthur Andersen and when we ask MBA students about the amount of fraud they have witnessed on the job. By using industry multiples, we estimate the median cost of a fraud is 40.7 percent of the pre-fraud enterprise value of the company. Hence, taking into account the overall incidence of fraud, we estimate that in publicly-traded companies with more than 750M in assets, corporate fraud costs 2.85 percent of enterprise value.
Keywords: fraud, corporate governance
JEL Classification: G3
Suggested Citation: Suggested Citation