Financial Fraud among 21st Century U.S. Public Companies: Extent, Nature, and Distinguishing Firm Characteristics

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Abstract

Fraudulent corporate schemes contributed to each of the past three economic recessions, yet hardly any modern data are available to inform about the extent, nature, or risk factors for financial malfeasance or other forms of white-collar corporate crime. With support from NIJ, we are collecting detailed, systematic information on top-executive, firm, and industry characteristics for companies involved in financial fraud and a rigorously selected comparison group of non-fraud public firms. Using the unique data we have compiled thus far, on firm-level characteristics of fraud-involved firms and a random sample of public firms, the present study addresses two central questions: What was the prevalence and nature of corporate financial fraud by US public companies in recent times? What were the typical characteristics of fraudulent firms overall and in comparison to a control group of non-fraudulent firms? Descriptive and multivariate logistic regression analyses demonstrated that older, larger, and more prestigious public companies traded on the NYSE had increased odds of engaging in corporate financial fraud. The Information industry was somewhat over-represented among fraudulent firms. A firm’s aggressive growth plan, signaled by various financial indicators, was associated with increased odds of financial fraud. Some results suggested that high-performing firms were more likely to engage in financial fraud, but findings were mixed. Future research, and our ongoing data collection effort, will focus on the importance of various characteristics of top-management decision-makers in initiating fraudulent financial schemes in America’s public companies.

Authors

• Jennifer Schwartz, Washington State University

• Darrell Steffensmeier, Penn State University