Accounting And Auditing Enforcement Releases Research Articles

Adopting Nonlinear Activated Beetle Antennae Search Algorithm for Fraud Detection of Public Trading Companies: A Computational Finance Approach

With the emergence of various online trading technologies, fraudulent cases begin to occur frequently. The problem of fraud in public trading companies is a hot topic in financial field. This paper proposes a fraud detection model for public trading companies using datasets collected from SEC’s Accounting and Auditing Enforcement Releases (AAERs). At the same time, this computational finance model is solved with a nonlinear activated Beetle Antennae Search (NABAS) algorithm, which is a variant of the meta-heuristic optimization algorithm named Beetle Antennae Search (BAS) algorithm. Firstly, the fraud detection model is transformed into an optimization problem of minimizing loss function and using the NABAS algorithm to find the optimal solution. NABAS has only one search particle and explores the space under a given gradient estimation until it is less than an “Activated Threshold” and the algorithm is efficient in computation. Then, the random under-sampling with AdaBoost (RUSBoost) algorithm is employed to comprehensively evaluate the performance of NABAS. In addition, to reflect the superiority of NABAS in the fraud detection problem, it is compared with some popular methods in recent years, such as the logistic regression model and Support Vector Machine with Financial Kernel (SVM-FK) algorithm. Finally, the experimental results show that the NABAS algorithm has higher accuracy and efficiency than other methods in the fraud detection of public datasets.

Political connections, tacit power and corporate misconduct

AbstractThis paper examines the impact of political connections (i.e., lobbying and political contributions) on the time it takes to detect corporate misconduct and the size of penalties following securities class actions (SCAs), restatements and Accounting and Auditing Enforcement Releases (AAERs). We find firms with political connections exhibit longer misconduct periods for SCAs, and such ability to conceal misconduct for longer translates into a larger settlement size. In addition, we find politically connected firms are associated with greater shareholder losses and are less likely to be involved in Securities Exchange Commission enforcement actions on restatements. Finally, while we do not find any relation between political connections and the likelihood of AAERs being settled, we find political connections are associated with lower AAER settlement size.

A textual analysis of the US Securities and Exchange Commission's accounting and auditing enforcement releases relating to the Sarbanes–Oxley Act

SummaryWe focus on textual analysis of the US Securities and Exchange Commission's accounting and auditing enforcement releases (AAERs). Our research question is: Did the Sarbanes–Oxley Act (SOX) 2002 affect the qualitative linguistic content of the AAERs in the post‐SOX period? To answer this question, we test the null hypotheses that there will be no differences in the qualitative verbiage and sentiment of AAERs in the time periods that we study related to the enactment of SOX: pre‐SOX and post‐SOX. To resolve the research question, we applied several text mining methods and classification machine‐learning methods. We first used two basic text‐mining methods, generating a bag of words and topic modeling, for descriptive analysis of the AAER content before the enactment of SOX and after the enforcement of SOX. We then conducted sentiment analysis using four sentiment dictionaries on the content of the two time periods: before SOX and after SOX. Finally, we developed three different classification models based on well‐known supervised learning algorithms and determined that SOX‐related AAERs could be distinguished from non‐SOX‐related AAERs. Based on the results, we conclude that there were significant linguistic differences in the AAER content of the post‐SOX period compared with the pre‐SOX period. In other words, post‐SOX‐related AAERs are qualitatively different in terms of linguistic contents and sentiment values compared with the non‐SOX‐related AAERs.

Fraud detection in publicly traded U.S firms using Beetle Antennae Search: A machine learning approach

In this paper, we present a fraud detection framework for publicly traded firms using an optimization approach integrated with a meta-heuristic algorithm known as Beetle Antennae Search (BAS). Existing techniques include human resources, like financial experts and audit teams, to determine the ambiguities or financial frauds in the companies based on financial and non-financial ratios. It is a laborious task, time-consuming, and prone to errors. We designed an optimization problem to minimize the loss function based on a non-linear decision function combined with the maximization of recall (Sensitivity and Specificity). We solved the optimization problem iteratively using the BAS. It is a nature-inspired algorithm and mimics the beetle’s food-searching nature. It includes a single searching particle to find an optimal solution to the optimization problem in n-dimensional space. We used a benchmark dataset collected from SEC’s Accounting and Auditing Enforcement Releases (AAERs) for the simulation. It includes 28 raw financial variables and the data collected between 1991–2008. For the comparison, we evaluated the performance of BAS with the recently proposed approach using RUSBoost. We also compared it with some additional algorithms, i.e., Logit and SVM-FK. The results showed that BAS is comparable with these algorithms and outperformed them in time consumption.

An examination of the influence of mutual CFO/audit firm tenure on audit quality

This study examines whether the extent of professional relationships between an audit firm and their client’s CFO influences audit quality. If regulators’ concerns that the relationship that develops over time between an audit firm and their client’s CFO impairs auditor judgment are justified, then we should observe a negative relationship between the length of audit firm’s tenure with their client’s CFO and audit quality. The results suggest that mutual audit firm-CFO tenure is associated with lower audit quality measured by the magnitude of discretionary accruals, the reduced incidence of issuance of going-concern audit opinions for distressed companies, and an increased likelihood of the receipt of an Accounting and Auditing Enforcement Release (AAER) from the US. Securities and Exchange Commission (SEC). These affects are concentrated in a subsample of firms with higher levels of corporate governance concerns. These findings have implications for policies related to audit firm rotation. Specifically, the results suggest that regulators need to consider other relationships underlying audit firm tenure, such as the relationships that form between audit firm and client personnel, when evaluating audit firm rotation policies.

The Differential Role of R&D and SG&A for Earnings Management and Stock Price Manipulation*

ABSTRACTThis paper documents a differential role of R&D versus selling, general, and administrative expenses (SG&A) for real earnings management. The distinction of these two components is important because prior studies mostly examine their combined use, but firms could manipulate them differently given the differing valuation implications. Reduced SG&A is viewed positively by investors as evidence of cost reduction, while reduced R&D is viewed negatively by investors as such expenditures are critical signals of expected growth. I examine their use in the context of seasoned equity offerings (SEOs) as well as firms receiving accounting and auditing enforcement releases (AAERs). Although both groups face strong incentives to manage earnings upward by reducing expenses, I predict and find that firms will reduce SG&A but increase R&D. During the manipulation period, SEO and AAER firms exhibit lower discretionary SG&A and higher discretionary R&D, relative to control firms, and investors positively value low discretionary SG&A and high discretionary R&D. Overall, this study confirms the importance of distinguishing between R&D and SG&A in real earnings management contexts and suggests a complementary (substitutive) relation between cutting SG&A (R&D) and accruals management.

Equity Incentives and Financial Misreporting: Evidence from the Wealth Pursuit Motive of CEOs

The incentive effect of CEO portfolio delta (i.e., the sensitivity of CEO wealth to changes in stock price) on financial misreporting is inconclusive given a complex reward-risk tradeoff faced by CEOs (e.g., a positive “reward effect” versus a negative “risk effect”). We propose that the prevalence of CEO hedging pushes the tradeoff more in favor of the “reward effect” side, resulting in a positive net incentive effect of CEO portfolio delta on misreporting. As the tradeoff is associated with a CEO’s explicit focus on personal wealth, we extract unstructured data from the Accounting and Auditing Enforcement Releases (AAERs) for the sample period 20042016 to identify misreporting driven by a CEO’s wealth-pursuing motive. We document that such misreporting is not only widespread in the sample but also positively explained by CEO portfolio delta. Consistent with our theoretical framework, we find that CEO hedging opportunities moderate the positive relationship between CEO portfolio delta and wealth-pursuing misreporting. We also use a simulation to illustrate how including misreporting cases not associated with the reward-risk tradeoff in the analysis might account for the mixed evidence of the delta-AAER association documented by prior studies. Our findings have important implications for compensation design and corporate governance policy.

Does financial reporting quality vary across firm life cycle?

AbstractThis study provides empirical evidence that across firm life cycle there is considerable variation in financial reporting quality. Specifically, the focus is on matching quality captured by the contemporaneous correlation between revenues and expenses and on the likelihood of material misstatements in financial statements. On balance, we observe an inverted U‐shaped pattern of financial reporting quality, that is, lower quality during the introduction, growth, and decline stages, compared to the mature stage of firm life cycle. First, we find poor matching of expenses with revenues in the introduction, growth, and decline stages. This implies conservative or aggressive recognition of expenses, leading to less informative earnings, and hence lower financial reporting quality. Then, we examine the likelihood of material misstatements, measured by weaknesses in internal control over financial reporting, financial statement restatements, Securities and Exchange Commission's (SEC) accounting and auditing enforcement releases (AAER), and financial statement divergence (FSD) scores. We find clear indications that firms in the introduction, growth, and decline stages are significantly more likely to have misstatements in their financial statements compared to firms in the mature stage. Overall, the findings of this study enhance our understanding of the role of life‐cycle stages in causing variation in financial reporting quality.

Does IRS Monitoring Deter Managers From Committing Accounting Fraud?

We examine whether monitoring by the Internal Revenue Service (IRS) affects managers’ decisions to engage in fraudulent financial reporting. We argue that IRS monitoring provides a disciplining effect reducing managements’ incentives to engage in rent diversion activities such as costly financial statement misreporting. Using information on IRS audit rates and instances of fraud disclosed in Securities and Exchange Commission (SEC) Accounting and Auditing Enforcement Releases (AAERs), we find evidence consistent with IRS monitoring providing positive spillover effects in reducing the likelihood of accounting fraud. Our results are robust to using a matched sample of fraud and nonfraud firms. Altogether, we find evidence that tax authorities provide positive externalities in reducing agency costs through monitoring and enforcement.

SEC enforcement targets: a Christian virtue ethics perspective

PurposeThe purpose of this paper is to provide a summary and synthesis of US Securities and Exchange Commission accounting and auditing enforcement release (AAER)-based research on financial misreporting firms and the firms’ management. Christian virtue ethics (CVE) is used as a framework for this review. Suggestions for future research are presented.Design/methodology/approachThis is a review of the academic literature covering AAERs. The findings are viewed through the lens of CVE.FindingsSeveral financial misconduct studies use samples developed from AAER targets. These studies commonly focus on specific characteristics of AAER targets. This paper presents and analyzes characteristics of AAER targets and considers how CVE may mitigate fraudulent reporting.Research limitations/implicationsThe main limitation of the research is that the literature review is confined to studies of financial fraud that use an AAER-based sample. Nevertheless, the sample is sufficient to provide insight into the common characteristics of AAER target firms and related entities. The benefits of CVE are considered. This study has relevant implications for investors, regulators and researchers concerned with financial reporting quality, fraud, regulatory oversight and business ethics.Originality/valueThis paper provides a set of AAER target features and considers how CVE may mitigate financial fraud. Financial regulators, accounting standards setters and researchers may be interested in the findings presented in this study.

Does Government Report Readability Matter? Evidence from Market Reactions to AAERs

We investigate whether market reactions to Accounting and Auditing Enforcement Releases (AAERs) of the U.S. Securities and Exchange Commission (SEC) vary with different levels of readability in the AAERs. After controlling for the complexity of an AAER report and the severity of the enforcement case, we find that when the AAER is more difficult to read, with readability measured based on the directives of the Plain Writing Act of 2010, markets react more negatively to the AAER announcement. Cross-sectional tests indicate that the effect of AAER readability is attenuated by investor sophistication and firm visibility, whereas the effect is more pronounced when AAER firms are exposed to greater uncertainty. Contrary to conventional wisdom that linguistically complex disclosures receive reduced market reactions, our results suggest that complex AAER announcements could trigger more negative stock price reactions, since investors under uncertainty and ambiguity tend to assume the worst and bid down the market value of AAER firms. Our study offers meaningful implications for regulators concerned with writing clarity in government documents.

Does government report readability matter? Evidence from market reactions to AAERs

We investigate whether market reactions to Accounting and Auditing Enforcement Releases (AAERs) of the U.S. Securities and Exchange Commission (SEC) vary with different levels of readability in the AAERs. After controlling for the complexity of an AAER report and the severity of the enforcement case, we find that when the AAER is more difficult to read, with readability measured based on the directives of the Plain Writing Act of 2010, markets react more negatively to the AAER announcement. Cross-sectional tests indicate that the effect of AAER readability is attenuated by investor sophistication and firm visibility, whereas the effect is more pronounced when AAER firms are exposed to greater uncertainty. Contrary to conventional wisdom that linguistically complex disclosures receive reduced market reactions, our results suggest that complex AAER announcements could trigger more negative stock price reactions, since investors under uncertainty and ambiguity tend to assume the worst and bid down the market value of AAER firms. Our study offers meaningful implications for regulators concerned with writing clarity in government documents.

Analisis Kualitas Auditor, Leverage Dan Persentase Saham Initial Public Offering Terhadap Earnings Management Perusahaan Go Public

AbstractThe action of corporate management to intervene in the process of drafting financial statements is an act of dysfunctional behavior that will affect the enhancement of personal welfare management and The company's employees and the value of its leadership. This research aims to test and prove empirically the cause and influence of earnings management in the company that go public after the enactment of Accounting and Auditing Enforcement Release (AAER) by Security Exchange Commission (SEC). The variables tested were reputation Auditor, Leverage and stock percentage of Initial Public Offering (IPO) at the company that go Public on the Indonesia Stock Exchange from 2000 to 2004. The method of analysis used is multiple regression that previously done testing through several stages. Results show that the leverage variable significantly affects earnings management. This indicates that the debt that is the source of external funds used to finance the business continuity is strongly associated with earnings management.

The Influence of Management Bonding on Firms’ Financial Reporting Risk

I investigate how top management cohesiveness/bonding affects firms’ financial reporting risk. I operationalize team cohesiveness/bonding by measuring the social connections among the top executives of firms through four types of social networks: educational background, employment history, off-the-job organization activities, and board positions. Using a sample of firms identified in the Accounting and Auditing Enforcement Releases (AAERs), I find that top management who are more cohesive and bonded through social connections are more likely to commit accounting misconduct. The cohesiveness/bonding among top management teams is associated with more years of financial misstatements and lower probability of misstatement detection. These results are consistent with a well-documented “groupthink” phenomenon in social psychology that is associated with dysfunctional decision-making processes. The results highlight the importance of considering social bonding status as a risk factor in investigating and detecting financial fraud.

Drilled to obey? Ex‐military CEOs and financial misconduct

Research Summary: We examine the influence of CEOs' military background on financial misconduct using two distinctive datasets. First, we make use of accounting and auditing enforcement releases (AAER) issued by the U.S. Securities and Exchange Commission (SEC), which contain intentional and substantial cases of financial fraud. Second, we use a dataset of “lucky grants,” which provide a measure of the likelihood of grant dates of CEOs' stock options having been manipulated. Results for both datasets indicate that CEOs who served in the military are less inclined to be involved in fraudulent financial reporting and to backdate stock options. In addition, we find that these relationships are moderated by board oversight (CEO duality and independent directors in the board).Managerial Summary: CEOs who formerly served in the U.S. military are prevalent among U.S. firms. The military puts strong emphasis on the obedience of its personnel. In this study, we test if time spent in the military leads individuals to be more obedient to rules and regulations in the years after they have left the military and become CEOs. Our findings strongly suggest that CEOs who served in the U.S. military are less likely to be involved in financial misconduct. We also find evidence that tougher board oversight strengthens this relationship. Our findings have implications for regulators, auditors, practitioners, and researchers who are interested in determinants of and mechanisms to prevent fraud and stock option backdating.

Muhasebe Standartları Bankalarda İşletme Performansını ve Finansal Tablo Manipülasyonunu Etkiler mi

Financial statement manipulation has been well-rounded analyzed in both finance and accounting literature as it is important to determine whether firms could affect both performance and accounting standards. The purpose of this study is to examine cases of financial reporting manipulations which were subject to published enforcement actions by the Securities Exchange Commission (SEC), Securities Class Action Clearinghouse (SCAC), Accounting and Auditing Enforcement Releases (AAERs) and General Accounting Office (GAO) between 1996 and 2014 for reasons of alleged financial misstatements in the USA. Therefore, this study will provide to examine the relationship between bank performance and financial statement manipulations in the accounting standards. More importantly, although financial misconduct such as financial reporting manipulation is an emerging topic of great importance, a comprehensive literature review of the subject has yet to be carried out in terms of accounting standards. In this context, this study focuses on financial reporting manipulation within the context of International Financial Reporting Standards (IFRS). This study is contributed to the literature by examining the impact of financial reporting manipulation within the same or different systems of accounting standards on bank financial reporting. Findings suggest that banks that manipulate financial statements increase their operating profitability and productivity as a measure of financial performance used in the IFRS.

Leveraging Financial Social Media Data for Corporate Fraud Detection

Corporate fraud can lead to significant financial losses and cause immeasurable damage to investor confidence and the overall economy. Detection of such frauds is a time-consuming and challenging task. Traditionally, researchers have been relying on financial data and/or textual content from financial statements to detect corporate fraud. Guided by systemic functional linguistics (SFL) theory, we propose an analytic framework that taps into unstructured data from financial social media platforms to assess the risk of corporate fraud. We assemble a unique data set including 64 fraudulent firms and a matched sample of 64 nonfraudulent firms, as well as the social media data prior to the firm’s alleged fraud violation in Accounting and Auditing Enforcement Releases (AAERs). Our framework automatically extracts signals such as sentiment features, emotion features, topic features, lexical features, and social network features, which are then fed into machine learning classifiers for fraud detection. We evaluate and compare the performance of our algorithm against baseline approaches using only financial ratios and language-based features respectively. We further validate the robustness of our algorithm by detecting leaked information and rumors, testing the algorithm on a new data set, and conducting an applicability check. Our results demonstrate the value of financial social media data and serve as a proof of concept of using such data to complement traditional fraud detection methods.

Earnings co-movements and earnings manipulation

This study develops a theory that predicts the lower the degree to which firms’ earnings are correlated with the industry the greater the probability a firm will issue a biased signal of firm performance. The theory provides for causal predictions in our empirical tests in which we examine the probability a firm will be subject to an Accounting and Auditing Enforcement Release (AAER). The empirical findings provide support for the theory, even after controlling for various predictive variables from the literature, indicating the degree of earnings co-movements with the industry is in fact a causal factor in managers decisions to bias earnings reports. We further illustrate that low co-movement firms are less conservative than high co-movement firms, which provides an application of our theory to a broader setting. Overall, we provide both a theory and an empirical validation of the theory helping to discipline the thinking about earnings management and allowing for causal relations to be uncovered.

Proxies and Databases in Financial Misconduct Research

ABSTRACT An extensive literature examines the causes and effects of financial misconduct based on samples drawn from four popular databases that identify restatements, securities class action lawsuits, and Accounting and Auditing Enforcement Releases (AAERs). We show that the results from empirical tests can depend on which database is accessed. To examine the causes of such discrepancies, we compare the information in each database to a detailed sample of 1,243 case histories in which regulators brought enforcement actions for financial misrepresentation. These comparisons allow us to identify, measure, and estimate the economic importance of four features of each database that affect inferences from empirical tests. We show the extent to which each database is subject to these concerns and offer suggestions for researchers using these databases. JEL Classifications: G38; K22; K42; M41.

Corporate Governance Consequences of Accounting Scandals: Evidence from Top Management, CFO and Auditor Turnover

This paper examines the consequences of accounting scandals to top management, top financial officers and outside auditors. We examine a sample of 518 U.S. public companies that announced earnings-decreasing restatements during the 1997–2002 period and an industry-size matched sample of control firms. Using logistic regressions that control for other determinants of management turnover, we find strong evidence of greater turnover of chief executive officers (CEOs), top management and chief financial officers (CFOs) of restating firms compared to the control sample. On average, over the three-year period surrounding the year of restatement announcement, CEOs and CFOs face, respectively, a 14% and 10% greater probability of being replaced in restating firms than in control firms, after controlling for other factors. These represent increases of about 42% and 23%, respectively, compared to the usual turnover probabilities for CEOs and CFOs. The magnitudes of these effects are even larger for restatements that are more serious, have worse effects on stock prices, result in negative restated earnings, are initiated by outside parties, are accompanied by Accounting and Auditing Enforcement Releases (AAERs), or trigger securities class action lawsuits. We find little systematic evidence that auditor turnover is higher in restating firms. Our paper provides evidence of effective functioning of internal governance mechanisms following accounting scandals.