Serious fraud can have serious consequences.

That’s the conclusion of a study of nearly 350 alleged accounting fraud cases investigated by the U.S. Securities and Exchange Commission between 1998 and 2007.

Fraud_Gavel_LawBook_iStock_000003679168XSmallThe study found that news of an alleged fraud resulted in an average 16.7 percent abnormal stock price decline in the two days surrounding the announcement.  Companies engaged in fraud also often experienced bankruptcy, delisting from a stock exchange, or asset sale, and in nine out of ten cases the SEC named the CEO and/or CFO for alleged involvement, the study found.

The report, Fraudulent Financial Reporting: 1998-2007, was sponsored by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), an independent private sector organization affiliated with several accounting and financial executive professional organizations.

Among other finds of the report:

  • Financial fraud affects companies of all sizes, with the median company having assets and revenues just under $100 million.
  • The median fraud was $12.1 million. More than 30 of the fraud cases each involved misstatements/misappropriations of $500 million or more.
  • The SEC named the CEO and/or CFO for involvement in 89 percent of the fraud cases. Within two years of the completion of the SEC investigation, about 20 percent of CEOs/CFOs had been indicted. Over 60 percent of those indicted were convicted.
  • Revenue frauds accounted for over 60 percent of the cases.
  • Many of the commonly observed board of director and audit committee characteristics such as size, meeting frequency, composition, and experience do not differ meaningfully between fraud and no-fraud companies. Recent corporate governance regulatory efforts appear to have reduced variation in observable board-related governance characteristics.
  • Twenty-six percent of the firms engaged in fraud changed auditors during the period examined compared to a 12 percent rate for no-fraud firms.
  • Initial news in the press of an alleged fraud resulted in an average 16.7 percent abnormal stock price decline for the fraud company in the two days surrounding the announcement.  News of an SEC or Department of Justice investigation resulted in an average 7.3 percent abnormal stock price decline.

The full text of the report is can be downloaded here (pdf).