Referring to a recent study conducted by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), deception (fraud) in financial reporting by public companies in the United States provides a significant negative consequences for investors and executives.
The COSO study, by reviewing the financial reports of fraud allegations investigated by the Securities and Exchange Commission (SEC) within a period of ten years between the years 1998 to 2007, discovered the fact that news of an alleged fraud has caused an abnormal decline in stock prices on average 16.7% within two days after the announced. Companies that engage in fraud often went bankrupt, delisted from stock exchanges, or have to sell assets, and nine out of ten cases the SEC says the CEO and / or CFO of the relevant companies allegedly involved in fraud.
COSO chairman, David Landsittel, said that in-depth analysis in the study related to the nature, scope, and characteristics of fraudulent financial reporting provides a very helpful understanding of new issues and the ongoing need to be addressed. "All parties involved in the financial reporting process should continue to focus on ways to prevent, deter, and detect fraudulent financial reporting," said Landsittel. "COSO plans to sponsor further research regarding the fraudulent financial reporting, as well as further development of internal control guidelines, to assist parties involved in the financial reporting process."
COSO study on examining nearly 350 cases of alleged financial reporting fraud are investigated by the SEC. The results showed that:
* Financial Fraud affects companies of all sizes, with the median company has assets and income of just under $ 100 million.
* The median fraud was $ 12.1 million. More than 30 cases with each case involving amounts more than $ 500 million.
* The SEC said the CEO and / or CFO indicated to be involved in 89% of cases of fraud. Within two years of completion of the SEC investigation, approximately 20% of the CEOs / CFOs continue in the indictment as well as more than 60% of whom were convicted.
* Cheating on income recorded over 60% of cases.
* Many of the characteristics that usually becomes a general observation the board of directors and audit committees, such as: size, frequency of meetings, composition, and experience, did not differ significantly between the companies involved are not cheating with. Efforts latest corporate governance arrangements appear to have reduced variation in the characteristics of the board of directors related to the observed.
* Twenty-six percent of the companies involved in fraud to replace the auditor during the period under study compared with only 12 percent of the companies that are not involved.
* News beginning in the mass media about alleged fraud resulted in an abnormal decrease in stock prices by an average of 16.7 percent for companies involved fraud, within two days after the announcement.
* News of the SEC or Justice Department investigation resulted in abnormal stock price decline an average of 7.3 percent.
* Companies that engage in fraud often experience bankruptcy, delisted from stock exchanges, or sale of material assets with a much higher rate than companies not involved fraud.
COSO study conducted by four professors of accounting: Mark S. Beasley from North Carolina State University, Joseph V. Carcello of the University of Tennessee, Dana R. Hermanson of Kennesaw State University, and Terry L. Neal of the University of Tennessee. This study updates previous similar studies COSO published in 1999, for cases of fraudulent financial reporting from 1987 to 1997 decade.
Professor Beasley, who is also a board member of COSO, noted that additional research is needed to better understand the differences in the processes surrounding the board of directors and audit committee. "We need to determine whether there are certain processes relating to the board of directors that could strengthen their oversight of the risks affecting the financial statements," he said. "Moreover, given the amount of fraud examined in this study are limited and associated with a period after the publication of the Sarbanes-Oxley Act of 2002 including Section 404 implementation, further research is needed before conclusions can be drawn about the impact of SOX on reducing fraudulent financial reporting." Documents this study can be downloaded for free on the COSO Web site:
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