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Could investors use voluntary ethics disclosure to assess the likelihood of fraudulent financial reporting?

Could investors use voluntary ethics disclosure to assess the likelihood of fraudulent financial... This study examines voluntary ethics disclosure among public companies that were investigated by the Securities Exchange Commission for fraudulent financial reporting, and whose first year of fraud was before the effective date of the Sarbanes–Oxley Act (SOX) and the New York Stock Exchange's (NYSE) ethics rule. The research question is that of whether investors could assess the likelihood of a firm's involvement in fraudulent financial reporting by reading its publicly available reports for voluntary ethics disclosure. The extent of ethics disclosure was measured by 18 aspects using a point system. The sample includes 111 fraud firms and 111 matched no-fraud firms. The three important findings are as follows. First, only 11.7 per cent of fraud firms and 19.8 per cent of no-fraud firms had ethics disclosure in their proxy statements and/or 10-K reports in the first year of fraud. Second, the extent of ethics disclosure was lower among fraud firms than no-fraud firms. Third, ethics disclosure was negatively related to the likelihood of fraudulent financial reporting based on a logit regression analysis that controls for five explanatory variables. These findings suggest that investors could use the extent of voluntary ethics disclosure to assess fraud likelihood. Therefore, these findings support the requirement of the SOX and the NYSE that listed firms must disclose their code of ethics. Given that many countries currently do not require ethics code and disclosure, two major implications are that (1) global investors could use the extent of voluntary ethics disclosure as a screening criterion for stock investments in these countries, and (2) policy makers in these countries may want to consider requiring their public companies to adopt and disclose an ethics code. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Disclosure and Governance Springer Journals

Could investors use voluntary ethics disclosure to assess the likelihood of fraudulent financial reporting?

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References (24)

Publisher
Springer Journals
Copyright
Copyright © 2009 by Palgrave Macmillan, a division of Macmillan Publishers Ltd
Subject
Business and Management; Business and Management, general; Accounting/Auditing; Corporate Finance; Corporate Governance
ISSN
1741-3591
eISSN
1746-6539
DOI
10.1057/jdg.2009.24
Publisher site
See Article on Publisher Site

Abstract

This study examines voluntary ethics disclosure among public companies that were investigated by the Securities Exchange Commission for fraudulent financial reporting, and whose first year of fraud was before the effective date of the Sarbanes–Oxley Act (SOX) and the New York Stock Exchange's (NYSE) ethics rule. The research question is that of whether investors could assess the likelihood of a firm's involvement in fraudulent financial reporting by reading its publicly available reports for voluntary ethics disclosure. The extent of ethics disclosure was measured by 18 aspects using a point system. The sample includes 111 fraud firms and 111 matched no-fraud firms. The three important findings are as follows. First, only 11.7 per cent of fraud firms and 19.8 per cent of no-fraud firms had ethics disclosure in their proxy statements and/or 10-K reports in the first year of fraud. Second, the extent of ethics disclosure was lower among fraud firms than no-fraud firms. Third, ethics disclosure was negatively related to the likelihood of fraudulent financial reporting based on a logit regression analysis that controls for five explanatory variables. These findings suggest that investors could use the extent of voluntary ethics disclosure to assess fraud likelihood. Therefore, these findings support the requirement of the SOX and the NYSE that listed firms must disclose their code of ethics. Given that many countries currently do not require ethics code and disclosure, two major implications are that (1) global investors could use the extent of voluntary ethics disclosure as a screening criterion for stock investments in these countries, and (2) policy makers in these countries may want to consider requiring their public companies to adopt and disclose an ethics code.

Journal

International Journal of Disclosure and Governance – Springer Journals

Published: Nov 19, 2009

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