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SYNOPSIS: This paper provides insight into financial statement fraud instances investigated during the late 1980s through the 1990s within three volatile industriestechnology, health care, and financial services-and highlights important corporate governance differences between fraud companies and no-fraud benchmarks on an industry-by-industry basis. The fraud techniques used vary substantially across industries, with revenue frauds most common in technology companies and asset frauds and misappropriations most common in financial-services firms.
For each of these three industries, the sample fraud companies have very weak governance mechanisms relative to no-fraud industry benchmarks. Consistent with prior research, the fraud companies in the technology and financial-services industries have fewer audit committees, while fraud companies in all three industries have less independent audit committees and less independent boards. In addition, this study provides initial evidence that the fraud companies in the technology and health-care industries have fewer audit committee meetings, and fraud companies in all three industries have less internal audit support.
This study of more current financial statement fraud instances contributes by updating our understanding of fraud techniques and risk factors in three key industries. Auditors should consider the industry context as they evaluate the risk of financial fraud, and they should compare clients' governance mechanisms to relevant no-fraud industry benchmarks.
Data Availability: The underlying fraud data in this study, which were gathered in the preparation of Fraudulent Financial Reporting: 1987-1997, An Analysis of U.S. Public Companies, are the property of the Committee of Sponsoring Organizations (COSO), and the underlying benchmark industry data are the property of the National Association of Corporate Directors (NACD).
In response to continuing concerns with the incidence of financial statement fraud in the U.S. (e.g., AICPA 1997; Lublin and MacDonald 1998), the Committee of Sponsoring Organizations of the Treadway Commission (COSO) recently released a study of financial statement fraud, Fraudulent Financial Reporting: 1987-1997, An Analysis of U.S. Public Companies (Beasley et al. 1999). The study examined Securities and Exchange Commission (SEC) enforcement actions against approximately 200 companies over the period 1987-1997 and provided insight into issues including the nature of the companies involved, the amounts of the frauds, the types of fraud committed, and the corporate governance mechanisms in place at the companies. The study served to update the Report of the National Commission on Fraudulent...