WHO BLOWS THE WHISTLE ON CORPORATE FRAUD?
August 2, 2007
In "Who Blows the Whistle on Corporate Fraud?" authors Alexander Dyck, Adair Morse, and Luigi Zingales seek to address that question -- which has implications for other countries beyond the United States -- by first gathering data on a comprehensive sample of alleged corporate frauds in the United States involving companies with more than $750 million in assets that took place between 1996 and 2004.
- The clearest finding emerging from the data is that, in the United States, fraud detection relies on a wide range of often improbable actors; no single type of whistle-blower accounts for more than 20 percent of the cases detected.
- This suggest that the failures of internal governance in other countries cannot be solved easily by introducing U.S. institutions, like class action suits or the Securities and Exchange Commission (SEC), which together account for only 8.4 percent of the revelation of frauds by external actors.
- Instead, an effective corporate governance system relies on a complex web of market actors who complement each other.
- Unfortunately, reproducing such a complex system abroad is much more difficult than copying a single legal institution.
- The "mandated" approach to fraud detection did not work well at all, at least before the Sarbanes-Oxley Act (SOX); in fact, fewer than 6 percent of the fraud cases were identified by the authority charged with discovering them (that is, the SEC).
- Even when the authors enlarge the definition of "authority" to include external auditors (who have a duty to disclose fraud when they find it, but not to search for it) and industry regulators (who are not in charge of looking for financial frauds), they find that only just over 35 percent of the cases of fraud were revealed by the people appointed to search for it.
Source: Les Picker, "Who Blows the Whistle on Corporate Fraud?" NBER Digest, August 2007; based upon: Alexander Dyck, Adair Morse, and Luigi Zingales, "Who Blows the Whistle on Corporate Fraud?" National Bureau of Economic Research, Working Paper No. 12882, February 2007.
Browse more articles on Economic Issues