Who Blows the Whistle on Corporate Fraud?

Abstract

To identify the most effective mechanisms for detecting corporate fraud, we study all reported fraud cases in large U.S. companies between 1996 and 2004. We find that fraud detection does not rely on standard corporate governance actors (investors, SEC, and auditors), but rather takes a village, including several nontraditional players (employees, media, and industry regulators). Differences in access to information, as well as monetary and reputational incentives, help to explain this pattern. In-depth analyses suggest that reputational incentives in general are weak, except for journalists in large cases. By contrast, monetary incentives help explain employee whistleblowing. Copyright (c) 2010 the American Finance Association.

The Effect of Analyst Coverage on the Relationship between Seasoned Equity Offerings and Investment Efficiency From Korea

“…Analysts perform a monitoring role in firms' financial reporting processes [23,25,43,44]. In fact, Yu (2008) [23] and Yoo et al (2012) [44] confirmed that the discretionary accruals decrease more in firms with many analysts.…”

“…In addition, recent researchers have shown that the disclosure of information through analysts' forecast activities can improve the quality of financial reporting. Dyck et al (2010) [43] reported that analysts (16.9%) are more likely to detect fraudulent cases of firms than external auditors (11.3%). Yu (2008) [23] and Yoo et al (2012) [44] confirmed that analysts' coverage affects earnings management through accruals, and that discretionary accruals are reduced more in firms with more analyst coverage.…”

“…Analysts discover and monitor managers' hidden earnings management [23,43,44]. Analysts seek to track firms' information and perform insightful analysis for in order to garner a higher reputation and earn more pay.…”

“…The insightful analysis of analysts is highly likely to detect earnings management through managers' discretionary accruals or real activities by predicting correct actual performance. Dyck et al (2010) [43] suggested that analysts outperform the SEC (Securities and Exchange Commission) and external auditors in the detection of fraud. Sun (2009) [49], Sun and Liu (2011) [50], and Yu (2008) [23] reported that analysts act as observers in the financial reporting process.…”

Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the Securities and Exchange Commission Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934

“…If there are too many exclusions, then individuals may be reluctant to risk coming forward. Recent research (Dyck et al 2010) suggests that employees have low costs to accessing information, but monetary incentives are needed to overcome the risks of coming forward.…”