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Fraudulent financial reporting by U.S. public companies often results in bankruptcy or business failure, according to a new study, and often results in significant immediate losses for shareholders and penalties for executives.

The study, by the Committee of Sponsoring Organizations of the Treadway Commission, examined financial statement fraud allegations investigated by the U.S. Securities and Exchange Commission over a 10-year period. The study found that news of an alleged fraud resulted in an average 16.7 percent abnormal stock price decline in the two days surrounding the announcement.

Companies engaged in fraud often experienced bankruptcy, delisting from a stock exchange, or an asset sale, and in nine out of 10 cases the SEC named the chief executive or chief financial officer for alleged involvement.

The study, "Fraudulent Financial Reporting: 1998-2007," examines nearly 350 alleged accounting fraud cases investigated by the SEC. It shows that 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 or misappropriations of $500 million or more. The SEC named the CEO and/or CFO for involvement in 89 percent of the fraud cases. 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.

Revenue frauds accounted for over 60 percent of the cases. Many of the commonly observed board of director and audit committee characteristics such as size, meeting frequency, composition, and experience do not differ meaningfully between fraud and no-fraud companies. Recent corporate governance regulatory efforts appear to have reduced variation in observable board-related governance characteristics.

Twenty-six percent of the firms engaged in fraud changed auditors during the period examined, compared to a 12 percent rate for no-fraud firms. 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 Justice Department investigation resulted in an average 7.3 percent abnormal stock price decline.

The full text of the study is available at www.coso.org. AT

Fraudulent financial reporting by U.S. public companies often results in bankruptcy or business failure, according to a new study, and often results in significant immediate losses for shareholders and penalties for executives.

The study, by the Committee of Sponsoring Organizations of the Treadway Commission, examined financial statement fraud allegations investigated by the U.S. Securities and Exchange Commission over a 10-year period. The study found that news of an alleged fraud resulted in an immediate and significant abnormal decline in the stock price of the company.

Companies engaged in fraud often experienced bankruptcy, delisting from a stock exchange, or an asset sale, and in nine out of 10 cases the SEC named the chief executive or chief financial officer for alleged involvement.

The study, "Fraudulent Financial Reporting: 1998-2007," examines nearly 350 alleged accounting fraud cases investigated by the SEC. It shows that 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 or misappropriations of $500 million or more.

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

Revenue frauds accounted for over 60 percent of the cases. Many of the commonly observed board of director and audit committee characteristics such as size, meeting frequency, composition, and experience do not differ meaningfully between fraud and no-fraud companies. Recent corporate governance regulatory efforts appear to have reduced variation in observable board-related governance characteristics.

Twenty-six percent of the firms engaged in fraud changed auditors during the period examined, compared to a 12 percent rate for no-fraud firms. 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 Justice Department investigation resulted in an average 7.3 percent abnormal stock price decline.

The full text of the study is available at www.coso.org.

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