Securities And Exchange Commission Research Articles

Mathematical Modelling and Artificial Intelligence (AI) for Detecting Financial Fraud: An Application of the Beneish M-Score in Support of SDG 16

Objective: This study examines the effectiveness of the Beneish M-Score model in detecting financial statement manipulation in companies charged with fraud by the U.S. Securities and Exchange Commission (SEC), aligning with Sustainable Development Goal (SDG) 16: Peace, Justice, and Strong Institutions, which promotes financial transparency and accountability. Theoretical Framework: Earnings management is a major concern in financial reporting, as it affects the reliability of financial statements. The Beneish M-Score model is a mathematical tool developed to detect earnings manipulation. Additionally, artificial intelligence (AI) is emerging as a complementary method to enhance fraud detection. Method: The research applies the Beneish M-Score model to three SEC-charged companies: DXC Technology Co., GTT Communications, Inc., and Luckin Coffee Inc. Financial data is collected from the SEC’s EDGAR database and company reports to compute the M-Score over multiple fiscal years. Results and Discussion: The model successfully flagged Luckin Coffee as a likely manipulator during its peak fraudulent period. DXC Technology Co. showed signs of manipulation in 2018, aligning with the SEC’s findings of misleading non-GAAP disclosures. GTT Communications, Inc. had a more stable M-Score, with no strong indications of manipulation. AI techniques, such as machine learning and neural networks, have the potential to improve fraud detection by analyzing financial patterns. Research Implications: This study supports the Beneish M-Score as a useful tool for detecting earnings manipulation and suggests integrating AI-driven methods to enhance accuracy in fraud detection. Originality/Value: The study contributes to forensic accounting research by validating the Beneish M-Score in real-world fraud cases and highlighting AI’s role in financial fraud detection, supporting SDG 16’s objectives of promoting transparency and strong institutions.

Enterprise Risk Management, Financial Reporting and Firm Operations

We examine financial reporting and firm operations, focusing specifically on the roles of ‘enterprise risk management’ (ERM), within which a holistic approach is taken to the conceptualization and management of all types of risk. We measure ERM implementation based on information obtained from 2004–2014 financial reports on 648 firms. We find that ERM implementation is associated with higher reporting quality and reduced volatility in future firm performance in terms of both operating cash flows and stock returns. Our difference-in-differences analyses indicate that these associations were strengthened by the introduction of the Securities and Exchange Commission (SEC) final rule in 2010, requiring increased and improved disclosure related to risk oversight. Our findings, which we attribute to the incremental effects of ERM and enhanced risk disclosure over time, point to the substantial advantages of ERM and the importance of related disclosure, which should prove to be of interest to firms as well as policymakers.

Evaluating the role of cybersecurity audits in protecting the US capital market

More recently, the United States capital market has experienced a rise in cyber threats which pose an alarming threat to capital market stability and investors’ confidence. This research explores how cybersecurity audits address these challenges. It highlights how audit committees have gradually started to consider cybersecurity as an important issue due to emerging threats. The Securities and Exchange Commission (SEC) has responded by adopting strict guidelines that insist that firms disclose their cybersecurity risk management policies and cyber incidents which emphasize the importance of accountability and transparency in the financial market (PWC, 2023). In addition, internal audit functions remain more critical today in evaluating the adequacy of cybersecurity risk controls, identifying vulnerability, and safeguarding sensitive information. Findings indicate that investors now consider cybersecurity disclosures while investing. Firms with no prior cyber incidents tend to gain from voluntary assurances, but companies with a history of cyber incidents face intense scrutiny about the competence of their management. Hence, this article emphasizes the critical contribution of cybersecurity audits in the protection of the US capital market by advocating for comprehensive risk evaluations, compliance with regulatory requirements, and proactive internal audit activities, thereby reinforcing the necessity of continuous improvement in cybersecurity protocols to maintain investor confidence and trust.

Bidirectional Optimality Theory: Unveiling the Relationship between Corporate Governance Compliance and Financial Performance in emerging economies.

This study examines the dynamic and simultaneous interaction between corporate governance and financial performance nexus using secondary data from 29 firms listed on the Ghana Stock Exchange (GSE) from 2010 to 2021. A corporate governance index (CGI) was calculated using an unweighted dichotomous response technique based on 144 self-administered survey questions guided mainly by the Securities and Exchange Commission (SEC) code(s) of governance, while Return on Asset (a proxy for FP) was calculated by dividing Profit After Tax (PAT) by the total assets of the sampled firms over time. The Panel VAR estimation technique recommended by Abrigo and Love (2016) was used to empirically study the causality and simultaneous interaction between these two variables within the framework of bidirectional optimality theory. The findings provide a new evidence by demonstrating a positive and significant bidirectional nexus between CG and FP, confirming the bidirectional theory on the basis of lag one structure of the PVAR model. Thus, shareholders and other stakeholders seeking a better return on their investments would equally expect a competent and effective corporate governance system to protect their investment and interests in Ghana. The results of the forecast error variance decomposition analysis support the selection of corporate governance as the most endogenous variable. This study however, remains limited to Ghana and may not apply to other contexts.

Accounting fraud detection through textual risk disclosures in annual reports: From the perspective of SEC guidelines

AbstractThis study investigates the use of textual risk disclosures in annual reports to detect accounting fraud. We developed an indicator system based on Securities and Exchange Commission (SEC) guidelines to evaluate the quality of risk disclosures. An analysis of 41,343 financial reports from US listed companies revealed that textual risk disclosures enhance fraud detection accuracy and function as an early warning system. The performance of these disclosures surpasses traditional analyses of the Management Discussion and Analysis section. Our findings highlight the value of textual risk disclosures in identifying accounting fraud and underscore the crucial role of regulatory guidelines in ensuring financial integrity.

Chief executive officer participation in their firm’s convertible note offerings

Directors, shareholders, and regulators want to understand the costs and benefits of financial arrangements between the firm and its chief executive officer (CEO). This paper examines why some CEOs participate in their firm’s convertible note offerings and the relationship between CEO participation and their firm’s lending outcomes. The author combines data collected directly from U.S. Securities and Exchange Commission (SEC) Form 4 and other filings, Capital IQ, and Compustat for 163 firms from 2003–2020. Firms frequently claim that their CEO participates in convertible note offerings to reduce the firm’s cost of debt. The author tests these claims using ordinary least squares (OLS) regression analysis and finds that note offerings have a lower interest rate and shorter time to maturity when the CEO participates. These results are consistent with the firms’ claims; however, the results may only apply to small, financially constrained firms. Additional tests of abnormal returns around CEO participation suggest investors respond positively to CEO participation. This study contributes to the literature by providing novel evidence of an understudied form of CEO wealth and documenting the relationship between CEO participation and less costly debt.

Impact of Crowdfunding Practices on Sales Growth of Selected Small Businesses in Lagos State: Role of Investor Attitude and Government Policy

The main objective of this study was to examine the impact of crowdfunding practices on sales growth of small businesses in Lagos State, Nigeria. The study adopted survey research design. Data were collected using questionnaire administered to 484 small businesses in Lagos State across the five (5) divisions (Ikeja, Ikorodu, Lagos Island, Badagary and Epe) and analysed using descriptive frequencies and regression analysis via SMARTPLS 3.0. The results revealed that DB, EB, ITC, and LB positively and significantly impact on sales growth ((β = 0.594; t-stat = 8.660; p<0.05); (β = 0.095; t-stat = 1.754; p<0.05); (β = 0.142; t-stat = 2.378; p<0.05); (β = 0.136; t-stat = 2.370; p<0.05) respectively, while RB impacted positively, REB impacted negatively ((β = 0.000; t-stat = 0.007; p>0.05); (β = -0.062; t-stat = 1.054; p>0.05) however, both impact were insignificant on sales growth of small businesses in Lagos. In view of the findings of the study, the researcher recommended that owners of small businesses should identify and focus on crowdfunding practices that enables it to achieve sales growth by extension guarantees survival of the business. Furthermore, study recommended that investors and fund raisers should be transparent in their engagements and try as much as possible to adhere to rules and regulations by Security and Exchange Commission (SEC) and other agencies to enable getting the needed financial resources that will enhance small business survival.

The Influence of Regulatory Framework and Environmental Factors on Accounting Practices by Companies in Ghana

This paper explores the influence of regulatory frameworks and environmental factors on the accounting practices of companies in Ghana. It emphasizes the critical role of a robust regulatory environment, maintained by bodies such as the Institute of Chartered Accountants, Ghana (ICAG), and the Securities and Exchange Commission (SEC), in ensuring transparency and consistency in financial reporting. The adoption of International Financial Reporting Standards (IFRS) has been pivotal in aligning Ghanaian accounting practices with global standards, although challenges remain in terms of implementation and compliance. Additionally, environmental factors such as economic conditions, technological advancements, sociocultural influences, and political stability significantly impact accounting practices. Economic stability encourages rigorous accounting standards, while technological advancements enhance the accuracy and efficiency of financial reporting. Sociocultural factors, including the education and professional development of accountants, and ethical standards, shape the quality of accounting practices. Political stability and effective legal systems are essential for enforcing accounting standards. This study provides valuable insights for regulators, policymakers, and practitioners, highlighting the need for continuous improvement in the regulatory framework and addressing environmental challenges to enhance the quality and reliability of financial reporting in Ghana.

Special Purpose Acquisition Companies (SPACs): A Legal Perspective on Corporate Governance, Securities Compliance, and Regulatory Challenges

Special Purpose Acquisition Companies (SPACs) have emerged as a notable money related instrument, offering exclusive organisations an elective course to open up to the world without the complexities of standard Beginning public contributions. These limitless free pass associations raise upholds through a First sale of stock with the sole inspiration driving meeting with or obtaining an ongoing business. Nevertheless, SPACs in like manner raise essential real challenges associated with corporate organisation, legal administrator commitments, securities consistence, and market straightforwardness. Allies and administrators of SPACs ought to adhere to extreme organisation guidelines to avoid hostile conditions and assurance financial backer protection. Authoritative bodies like the Securities and Exchange Commission (SEC) in the U.S. likewise, SEBI in India have analysed SPACs, focusing in on openness practices, the risks of debilitating, and monetary supporter assurances. The cross-line nature of some SPAC trades further jumbles the legal scene, requiring wary thought with respect to charge, new exchange, and combination control rules. As SEBI examines a design to work with SPACs in India, counterbalancing improvement with rule will be essential for empowering business area trust and efficient turn of events. This paper offers pieces of information into the progressing managerial environment and what the future holds troubles defying SPACs all over the planet.

A Content Analysis of the Modernization of Regulation S-K Items 101, 103, and 105

In 2020, the U.S. Securities and Exchange Commission (SEC) adopted amendments to modernize the disclosure requirements of Regulation S-K Items 101, 103, and 105. These amendments aim to enhance the readability of disclosure documents and provide investors with more relevant information. This study conducts a content analysis of the modernized disclosure items to assess the extent and nature of the changes implemented. A sample of annual reports filed before and after the amendments was examined to determine whether the SEC meets its stated goals of improving the readability of disclosure documents and discouraging repetition and immaterial information. We conclude that the stated SEC goals for modernization were not met in terms of textual characteristics. These findings provide insights into the effectiveness of the SEC's efforts to update disclosure rules and improve investor’s informational value.

Regulation by enforcement: the impact of Securities and Exchange Commission enforcement actions on crypto valuation

Purpose This paper aims to examine the impact of enforcement actions by the US Securities and Exchange Commission (SEC) on the valuation of major crypto assets. Design/methodology/approach Given the recent increase in regulatory efforts to combat fraudulent activity within the market, the paper concentrates on the period from 2019 to 2023 and uses the event study approach. Findings The analysis reveals a negative and economically significant effect of SEC actions on crypto valuations, ranging from −0.7% to −1.4% over a three-day window surrounding the announcement of enforcement actions for the entire sample. Particularly, a pronounced negative reaction is observed from crypto investors to SEC enforcement actions in 2022 and those where individuals are charged. Originality/value The findings align with existing literature, even though the study uses more conservative methodological approaches and data selection criteria. Specifically, the author uses a market event study model, account for potential confounding events, and use initial news reports about investigations rather than official SEC communications as event dates.

Does CEO age matter in auditor choice and audit pricing? The role of CEO dominance

Does CEO age matter in auditor choice and audit pricing? The role of CEO dominance

The Economic Consequences of Climate Risk Disclosures

ABSTRACT As the U.S. Securities and Exchange Commission (SEC) implements rules to improve and standardize climate-related disclosures among public companies and the climate change dilemma unfolds, understanding the economic implications of climate risk disclosures becomes crucial for stakeholders. This study aims to synthesize research developments in the climate risk disclosure domain to provide valuable insights into current research trends and identify potential avenues for future research. More specifically, this study identifies prior research that investigates the economic or financial effects of climate disclosures. Prior studies find both positive and negative effects of climate risk and suggest that climate disclosures may mitigate the effects of climate risk. Our review synthesizes the results of prior studies and identifies the prevailing theoretical frameworks used. Based on our assessment of the findings in prior studies, we also reveal emerging research trends and suggestions for future research. Data Availability: The data used in this research are publicly available and can be made available upon request. JEL Classifications: Q54; M41; G32; G38; Q58.

Sentiment-devoid lexicons: A novel method for domain-specific textual analysis in business and governance documents

Sentiment-devoid lexicons: A novel method for domain-specific textual analysis in business and governance documents

An in-depth analysis of the evolution and challenges of financial reporting in Nigeria

The evolution of financial reporting in Nigeria has been influenced by a combination of legal systems, global standards, and emerging trends. This article will demonstrate the financial reporting environment in Nigeria in detail such as regulatory bodies, accounting standards, reporting requirements for different entities, tax implications, auditing techniques, corporate governance principles, and emerging issues. The chapter discusses a paradigm shift towards IFRS that took place in 2012, and the obstacles companies faced in adjusting their systems to international norms. The role of regulators, like Federal Republic of Nigeria Financial Reporting Council (FRCN) and Securities and Exchange Commission (SEC), and the impact of legislative amendments, such as Companies and Allied Matters Act (CAMA) 2020, is also looked into in this research. In addition, the article discusses the specific problems encountered in the oil and gas, finance, and telecommunications industries, highlighting the unique accounting issues and regulatory requirements. Furthermore, the ethical side of financial reporting is included, namely honesty, openness, and whistle blowing. We utilised relevant published data (2004–2014) from diverse, reliable databases. The outcome is a clear depiction of the need for joint initiatives by regulators, firms, professional bodies and stakeholders to tackle the challenges present in Nigerian financial reporting and create a climate of transparency and reliability. Keywords: Financial Reporting, Nigeria, International Financial Reporting Standards (IFRS), Corporate Governance, Auditing Practices, Taxation

Corporate Governance in Nigeria: Evolution, Regulatory Frameworks and Challenges

Aims: Undoubtedly, good corporate governance is critical for economic growth and development. In Nigeria, corporate governance has undergone a considerable revolution, driven by regulatory reforms, global standards as well as the need to strengthen corporate institutions. This review explored the evolution of corporate governance practices in Nigeria and the operating environment of the Nigerian Stock Exchange highlighting the milestones, regulatory frameworks and key challenges inhibiting the corporate sector. The review emphasized the roles of the regulatory agencies including the Securities and Exchange Commission (SEC), Financial Reporting Council of Nigeria (FRCN), Central Bank of Nigeria (CBN), National Insurance Commission (NAICOM), Pension Commission (PENCOM) as well as the Nigerian Communications Commission (NCC) in enforcing governance codes and principles. Study Design: It is a theoretical review that explores developments in the corporate governance landscape in Nigeria. Place and Duration of Study: The place of study is Nigeria and the duration is 1960 to 2024. Methodology: The study examined policy documents exploring different codes and mechanisms of corporate governance from inception to date. Results: While notable progress has been made through the introduction of corporate governance codes, mechanisms and regulatory oversight, challenges such as corruption, insider abuse and enforcement of governance policies remain prevalent. Conclusion: The review underscored the need for continuous improvement in corporate governance given its role in promoting transparency, accountability, increasing stakeholder awareness as well as stronger enforcement to ensure good governance practices and sustainable economic growth.

The Impact of the COVID-19 Pandemic on Trading in the Stock Market: A Legal Perspective

The COVID-19 pandemic significantly impacted global stock markets, leading to unprecedented volatility and legal challenges. This study explores how the pandemic altered trading behavior and examines the associated legal ramifications. In March 2020, stock markets experienced a sharp decline, prompting the U.S. Federal Reserve and other regulatory bodies to intervene. While markets rebounded, volatility persisted, introducing heightened risks for investors. Non- professional investors became more active, complicating regulatory oversight. From a legal perspective, the pandemic raised concerns about stock price manipulation, insider trading, and market abuse. Regulators, like the U.S. Securities and Exchange Commission (SEC), responded by implementing temporary measures to maintain market integrity. These legal frameworks, designed for traditional crises, struggled to address the unique challenges posed by COVID-19. Furthermore, the pandemic revealed gaps in existing laws, prompting calls for updated regulations to manage market disruptions during non-financial crises. The study underscores the need for ongoing legal adaptation to safeguard markets and prevent exploitation during global emergencies. As the pandemic evolved, so did the legal landscape, with cases emerging that highlighted both opportunistic trading and regulatory inadequacies. This research contributes to understanding the intersection of market volatility and legal frameworks in times of crisis.

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) VS. US GAAP: A GLOBAL PERSPECTIVE

In light of the growing tendency of firms extending their operations into international markets, the adoption of worldwide accounting standards has become more urgent. The direction of attempts to bring international accounting standards closer to parity with US GAAP has been drastically changed as a result of two recent opinions issued by the SEC with a considerable impact. This article discusses the consequences that the SEC's decision to allow international enterprises to use IFRS in financial reporting, separate from reconciliation to US GAAP, has had on investors, multinational corporations, and global financial reporting by examining the implications of this decision. The idea that the Securities and Exchange Commission (SEC) has to bring together foreign authorities to discuss the harmonization of accounting standards is also discussed. According to the Securities and Exchange Commission (2018), the International Accounting Standards Committee Foundation (IASCF) is planning to establish a Monitoring Group that will include of the European Commission, the Japan Financial Services Agency, and the International Organization of Securities Commission (IOSC). In this section, we will examine the differences between IFRS and US GAAP. After careful consideration, the authors have arrived at the conclusion that there is an immediate need for a unified set of global accounting standards that are based on both IFRS and US GAAP. Many of the problems that have been plaguing the globe's financial reporting system will be resolved, and as a consequence, the economy of the whole world will become more secure and prosperous.

Konsep Disgorgement Fund Antara Indonesia, India dan Amerika Serikat Melalui Studi Perbandingan Hukum

This research aims to analyze the concept of Disgorgement Fund in Indonesia, India, and the United States through a comparative legal study approach. The Disgorgement Fund is a legal mechanism aimed at returning illegally obtained profits to the aggrieved parties and serves as a form of recovery for investors. The methodology employed includes analysis of legislation, court practices, and regulatory policies in the three countries. The findings indicate that while all three countries share the same goals in the implementation of the Disgorgement Fund, there are significant differences in the implementation and legal approaches taken. In the United States, the Disgorgement Fund is detailed by the Securities and Exchange Commission (SEC), while in Indonesia and India, it is still in the developmental stage and often influenced by local social and economic contexts. This research provides recommendations for enhancing the legal framework and implementation of the Disgorgement Fund in Indonesia and India, as well as offering a broader perspective on understanding the importance of investor protection in the context of the global capital market.

Matrix Completion When Missing Is Not at Random and Its Applications in Causal Panel Data Models

This article develops an inferential framework for matrix completion when missing is not at random and without the requirement of strong signals. Our development is based on the observation that if the number of missing entries is small enough compared to the panel size, then they can be estimated well even when missing is not at random. Taking advantage of this fact, we divide the missing entries into smaller groups and estimate each group via nuclear norm regularization. In addition, we show that with appropriate debiasing, our proposed estimate is asymptotically normal even for fairly weak signals. Our work is motivated by recent research on the Tick Size Pilot Program, an experiment conducted by the Security and Exchange Commission (SEC) to evaluate the impact of widening the tick size on the market quality of stocks from 2016 to 2018. While previous studies were based on traditional regression or difference-in-difference methods by assuming that the treatment effect is invariant with respect to time and unit, our analyses suggest significant heterogeneity across units and intriguing dynamics over time during the pilot program. Supplementary materials for this article are available online, including a standardized description of the materials available for reproducing the work.