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The changing face of regulators' investigations into financial statement fraud



Purpose – This paper builds on the Committee of Sponsoring Organizations (COSO) Report, which examined US Accounting and Auditing Enforcement Releases (AAERs). The purpose of this paper is to provide valuable insights into the characteristics and realities of financial statement fraud in the post-Enron regulatory environment. Design/methodology/approach – This paper analyses a sample of AAERs from 2002 to 2005. It also provides case studies of an additional five high-profile case studies from that period. Findings – This paper finds evidence of changes in Securities and Exchange Commission (SEC) enforcement activities since the COSO Report. Specifically, it is found that enforcement activities have increased substantially post-Enron and the companies subject to AAERs are, on average, much larger, more profitable and the frauds are more substantial than those exhibited in the COSO Report. These findings suggest that the SEC has become more aggressive at pursuing larger companies for financial statement fraud in the post-Enron environment. Research limitations/implications – This paper relies on AAERs as the source of analysis of financial statement fraud, its findings must be viewed in light of the limitations of using these documents. Specifically, the prevailing prosecutions agenda of the US SEC may be reflected in these results. Practical implications – The study findings are of great practical relevance to accounting regulators and practitioners as they provide valuable insights into the nature and characteristics of financial statement fraud. Originality/value – The paper provides empirical evidence concerning the changing face of financial statement fraud enforcement and provides a more in-depth comparison of fraud than possible with most previous studies that have tended to focus on quantitative measures. This is possible because the present investigation utilises qualitative data from AAERs to supplement quantitative findings. Its originality is also due to the use of institutional theory which is not commonly applied in the corporate governance field. Originality/value – The relationship between firms' financial health and discretionary accruals reveals an agency problem in credit markets with financially stressed firms. More attention is required on firms whose financial condition is uncertain. Also, it is documented that significant findings of importance to the earnings quality and corporate governance literature by documenting the role of corporate governance on discretionary accruals and financial status.

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