Externalities of Financial Statement Fraud on the Incoming Accounting Labor Force

• In Event: Auditor Labor Markets II

Abstract

Financial statement fraud generates many negative effects, including reducing people’s willingness to participate in the stock market. If it also stigmatizes accounting, it may similarly adversely affect the quantity and quality of workers willing to become accountants, thereby potentially creating negative effects for years to come. We examine the impact of fraud on the labor force entering the accounting profession, which is a key input into the production of accounting information (i.e., the output). Using data describing millions of college students across the U.S., we find incoming students are actually more likely to major in accounting when local frauds occur during their formative years. These students are also more likely to have attributes desired by the accounting profession (e.g., high academic aptitude), go into public accounting, and become CPAs. Thus, while fraud is unmistakably bad, it appears to have the positive unintended consequence of attracting quality labor into accounting.

Authors

• Robert Ronald Carnes, University of Florida

• Dane M Christensen, University of Oregon

• Paul E. Madsen, University of Florida