How Pervasive is Corporate Fraud?
March 5, 2013 Leave a comment
How Pervasive is Corporate Fraud?
I. J. Alexander Dyck University of Toronto – Rotman School of Management
Adair Morse University of California, Berkeley – Haas School of Business; University of Chicago – Booth School of Business
Luigi Zingales University of Chicago Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); University of Chicago – Polsky Center for Entrepreneurship; European Corporate Governance Institute (ECGI)
February 22, 2013
Abstract:
We estimate what percentage of firms engage in fraud and the economic cost of fraud. Our estimates are based on detected frauds, and frauds that we infer are started but are not caught. To identify the ‘iceberg’ of undetected fraud we take advantage of an exogenous shock to the incentives for fraud detection: Arthur Andersen’s demise, which forces companies to change auditors. By assuming that the new auditor will clean house, and examining the change in fraud detection by new auditors, we infer that the probability of a company engaging in a fraud in any given year is 14.5%. We validate the magnitude of this estimate using alternative methods. We estimate that on average corporate fraud costs investors 22 percent of enterprise value in fraud-committing firms and 3 percent of enterprise value across all firms.
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