Merger Magic: Is there a Relationship between Accounting Fraud and M&A?

• In Event: Earnings Quality and Fraud

Abstract

Merger and acquisition (M&A) activity peaked in the late 1990s – early 2000s, a time period that simultaneously saw an onslaught of high profile and well publicized accounting frauds. Drawing from prior research it is hypothesized that accounting fraud is positively related to the number of M&A made by the acquiring firm and to the acquiring firm’s use of stock as the primary method to finance the acquisition. These relationships are examined using a set of 75 firms accused of accounting fraud by the Securities and Exchange Commission during the years of 1998 through 2004, matched to 75 firms not accused of accounting fraud during the same period. Support is found for the hypotheses. Results show that fraud firms were significantly more active in acquiring and merging with other firms than were the firms in the no fraud matched sample, and that fraud firms were more likely to use stock finance M&A than were the no-fraud firms. This is an important topic of study to auditors, investors and other users of financial statements, as the US begins to see heightened M&A activity and accounting fraud continues to occur.

Authors

• Carmelita N. Troy, Andrews University

• Madeline Domino, Mercer University - Macon