Study: Many Executives Escape Punishment for Accounting Fraud

There have been so many corporate accounting frauds since the 1990s that it can be hard to keep track of what the outcomes were from the frauds. In particular, keeping tabs on drawn out criminal and civil cases against the executives implicated in accounting frauds can be tough.

One of the best studies so far on accounting fraud was published last year by the Committee of Sponsoring Organizations of the Treadway Committee, a group backed by various accounting associations. The study is entitled “Fraudulent Financial Reporting: 1998-2007," and -- for some of us, anyway -- it makes for fascinating reading.The study looked at nearly 350 cases of accounting fraud. Among its findings:

Financial fraud affects companies of all sizes, with the median company having assets and revenues just under $100 million.

The median fraud was $12.1 million. More than 30 of the fraud cases each involved misstatements/misappropriations of $500 million or more.

The SEC named the CEO and/or CFO for involvement in 89 percent of the fraud cases. 

Initial news in the press of an alleged fraud resulted in an average 16.7 percent abnormal stock price decline for the fraud company in the two days surrounding the announcement.

News of an SEC or Department of Justice investigation resulted in an average 7.3 percent abnormal stock price decline.

Companies engaged in fraud often experienced bankruptcy, delisting from a stock exchange, or material asset sales at rates much higher than those experienced by no-fraud firms.

Those are so some pretty negative consequences for companies where executives fudged the books -- particularly for shareholders who had no responsibility whatsoever for perpetrating such frauds but took a bath anyway.

But what happened to the executives accused of accounting fraud? Well, here's the finding that really caught my attention: "Within two years of the completion of the SEC investigation, about 20 percent of CEOs/CFOs had been indicted. Over 60 percent of those indicted were convicted."

In other words, only 1 in 5 executives involved in these frauds faced any criminal charges, and of those, nearly half got off. So basically the historic record suggests that executives had only about a ten percent chance of doing jail time for major financial crimes that cost shareholders millions of dollars. Well, no wonder so many CEOs and CFOs were ready to cook the books.

The odds surely changed with the passage of Sarbanes-Oxley after the Enron collapse. But the ongoing stream of accounting fraud cases suggest that plenty of executives are still willing to roll the dice.

Fraud Study Overview