Working Paper: CEPR ID: DP6126
Authors: Alexander Dyck; Adair Morse; Luigi Zingales
Abstract: What external control mechanisms are most effective in detecting corporate fraud? To address this question we study in depth all reported cases of corporate fraud in companies with more than 750 million dollars in assets between 1996 and 2004. We find that fraud detection does not rely on one single mechanism, but on a wide range of, often improbable, actors. Only 6% of the frauds are revealed by the SEC and 14% by the auditors. More important monitors are media (14%), industry regulators (16%), and employees (19%). Before SOX, only 35% of the cases were discovered by actors with an explicit mandate. After SOX, the performance of mandated actors improved, but still account for only slightly more than 50% of the cases. We find that monetary incentives for detection in frauds against the government influence detection without increasing frivolous suits, suggesting gains from extending such incentives to corporate fraud more generally.
Keywords: Corporate Finance; Corporate Governance
JEL Codes: G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary incentives (M52) | fraud detection effectiveness (C52) |
| SEC (G18) | fraud detection (M48) |
| auditors (M42) | fraud detection (M48) |
| media (L82) | fraud detection (M48) |
| industry regulators (G18) | fraud detection (M48) |
| employees (M51) | fraud detection (M48) |
| information access (L86) | fraud detection (M48) |
| incentives (M52) | likelihood of fraud detection (C52) |
| actor type (L82) | timing of fraud detection (G14) |