COSO has released an interesting study that examines 347 alleged accounting fraud cases investigated by the U.S. Securities and Exchange Commission (SEC) over a ten-year period ending December 31, 2007.
The study provides an in-depth analysis of the nature, extent and characteristics of accounting frauds occurring throughout the ten years, and provides helpful insights regarding new and ongoing issues needing to be addressed.
Highlights of the study include:
- Financial fraud affects companies of all sizes, with the median company having assets and revenues just under $100 million.
- The median fraud was $12.1 million. More than 30 of the fraud cases each involved misstatements/misappropriations of $500 million or more.
- The SEC named the CEO and/or CFO for involvement in 89 percent of the fraud cases. Within two years of the completion of the SEC investigation, about 20 percent of CEOs/CFOs had been indicted. Over 60 percent of those indicted were convicted.
- Revenue frauds accounted for over 60 percent of the cases.
- Many of the commonly observed board of director and audit committee characteristics such as size, meeting frequency, composition, and experience do not differ meaningfully between fraud and no-fraud companies. Recent corporate governance regulatory efforts appear to have reduced variation in observable board-related governance characteristics.
- Twenty-six percent of the firms engaged in fraud changed auditors during the period examined compared to a 12 percent rate for no-fraud firms.
- Initial news in the press of an alleged fraud resulted in an average 16.7 percent abnormal stock price decline for the fraud company in the two days surrounding the announcement.
- News of an SEC or Department of Justice investigation resulted in an average 7.3 percent abnormal stock price decline.
- Companies engaged in fraud often experienced bankruptcy, delisting from a stock exchange, or material asset sales at rates much higher than those experienced by no-fraud firms.
The study updates a previous COSO study issued in 1999, Fraudulent Financial Reporting: 1987-1997. The study is available for downloading here.
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