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Joe Carcello

KNOXVILLE — A study by two College of Business Administration accounting professors at the University of Tennessee, Knoxville, shows that corporate financial fraud doesn’t pay.

Professors Joe Carcello and Terry Neal were part of a team that conducted a 10-year study for the Committee of Sponsoring Organizations of the Treadway Commission (COSO), a private-sector organization dedicated to business ethics. The study, “Fraudulent Financial Reporting: 1998-2007,” examined 347 alleged fraud cases investigated by the U.S. Securities and Exchange Commission (SEC).

“We found that there were long-term, negative consequences associated with fraud,” Carcello said. “Companies engaged in fraud often experienced bankruptcy, delisting from a stock exchange, or material asset sales following discovery of fraud – at rates much higher than those experienced by no-fraud firms.”

Twenty-eight percent of companies allegedly engaged in fraud went bankrupt and 62 percent had to liquidate assets within two years. Forty-seven percent of the companies were delisted from a stock exchange.

The study discovered that within two days of a public company’s alleged fraud being reported, its stock price declined by an average of 17 percent. News of an SEC or Department of Justice investigation was accompanied by an average seven percent stock price decline.

The study discovered that CEOs and CFOs are largely to blame.

“Out of all the public companies investigated for fraud by the SEC in the 10-year period, 89 percent of cases implicated CEOs and/or CFOs as the responsible parties,” Carcello said. “Within two years of completion of the SEC’s investigation, about 20 percent of the CEOs/CFOs had been indicted and over 60 percent of those had been convicted.”

Compared to a previous 11-year study (1987-1997), there was an 18 percent increase in the number of companies investigated during this study — 347 cases vs. 294 cases. However, the authors discovered a 1,600 percent increase in the amount of money involved; the average dollar amount per case soared to nearly $400 million versus $25 million during the previous study. The authors noted that these results were highly influenced by the high-profile fraud cases of Enron, WorldCom and 30 other major frauds during this period.

Other findings of the study include:

  • Companies allegedly engaging in financial fraud had median assets and revenues just under $100 million, significantly greater than comparable companies in the previous study, which had median assets and revenues under $16 million.
  • There were few differences noticed between the boards of directors of fraud and no-fraud companies in regard to size, meeting frequency, composition and experience.
  • 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.
  • Revenue frauds accounted for more than 60 percent of fraud cases.

The study was co-authored by Dana Hermanson of Kennesaw State University and Mark Beasley of North Carolina State University.

To view the study, visit

For more information about the UT Knoxville College of Business Administration, visit

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