A Discourse on the Association of Accounting Fraud to Mergers and Acquisitions

• In Event: Fraud in Mergers and Acquisitions, the Energy Industry, and Extra-Statutory Sanctions

Abstract

In this paper we address the relationship between acquisitions and accounting fraud. Prior literature has shown that acquisitions generally are good for target companies’ shareholders but not for acquiring companies. There is evidence that many, if not most, acquisitions are later diversified. Since an acquisition strategy can destroy one or both of the firms’ value and ultimately harm investors, we attempt to determine if accounting fraud can historically be linked to greater acquisition activity in comparison to no-fraud companies. Looking at a sample of firms subject to SEC enforcement action for accounting fraud that started between 1998 and 2004, we find that the fraud firms were significantly more active in acquiring other firms than were the firms in the no-fraud matched sample, and that fraud firms are more likely to use stock to finance the acquisition than were the no-fraud firms.

Authors

• Madeline Domino, Mercer University - Macon

• Carmelita Troy, Andrews University