Fraudulent Financial Reporting and the Consequences for Employees

Abstract

We examine employment effects, such as wages and employee turnover, before, during, and after periods of fraudulent financial reporting. To analyze these effects, we combine U.S. Census data with SEC enforcement actions against firms with serious misreporting ("fraud"). We find, compared to a matched sample, that fraud firms' employee wages decline by 9% and the separation rate is higher by 12% during and after fraud periods. Employment growth at fraud firms is positive during fraud periods and negative afterward. We explore the heterogeneous effects of fraudulent financial reporting, including thin and thick labor markets, bankruptcy and non-bankruptcy firms, worker movements, pre-fraud wage levels, and period of hire. Negative wage effects are particularly severe in thin labor markets, for bankrupt, fraud firms, and lower wage employees. However, some negative wage effects occur across these sample cuts, indicating that fraudulent financial reporting appears to create meaningful and prevalent consequences for employees. We discuss how our results can be consistent with channels such as labor market disruptions, punishment, and stigma.

Financial misconduct and employee mistreatment: Evidence from wage theft

“…In sum, my findings suggest that wage theft precedes financial misconduct. This result is consistent with Choi and Gipper (2019), who find that lower-paid employees' wages decline significantly in the years immediately preceding financial fraud; the results in Table 8 suggest one mechanism (wage theft) by which this decline occurs.…”

Fraud Firms' Non‐Implicated CFOs: An Investigation of Reputational Contagion and Subsequent Employment Outcomes*

“…After the public revelation of fraud, we do not find significant differences in subsequent employment between the non‐implicated and non‐fraud CFOs through two years after the SEC's first AAER. These results extend prior literature by revealing that while at‐fault executives often face compensation penalties (Hoitash et al 2012; Choi and Gipper 2021) and limited employment opportunities (Desai et al 2006; Karpoff et al 2008), non‐implicated CFOs enjoy better employment opportunities than non‐fraud CFOs until the public revelation of fraud.…”

“…The results support this inference, revealing compensation penalties for these professionals. Finally, Choi and Gipper (2021) focus on low‐wage employees who are unlikely to have been associated with fraudulent financial reporting, showing that they still suffer wage detriments and heightened turnover.…”

The Effect of Ethical Commitment Reminder and Reciprocity in the Workplace on Misreporting

“…This study focuses on misreporting, which is a type of occupational fraud that is defined as the managers' action of intentionally withholding or misrepresenting information (Chong & Wang, 2019;Keil & Robey, 2001). Prior studies have suggested that misreporting can lead to negative consequences for an organization (e.g., Choi & Gipper, 2019;Gao & Jia, 2021;Karpoff et al, 2008;Smith et al, 2009). 1 For example, Smith et al, (2009, p. 577) suggest that "without complete and accurate status information, a project manager's ability to monitor progress, allocate resources effectively, and detect and respond to problems is greatly diminished, and this can lead to impaired project performance."…”