Dire consequences for companies engaging
in financial fraud

The Atlanta Journal-Constitution

Accounting fraud usually starts at the top of the corporate ladder, but its effects filter all the way back down.

Dana Hermanson, Dinos Eminent Scholar of Private Enterprise and accounting professor at Kennesaw State University’s Coles College of Business, said a recent 10-year study from the Treadway Commission found that in 90 percent of the 347 cases of alleged fraudulent reporting it identified in public companies from 1998-2007, CEOs and CFOs were implicated in the U.S. SEcurities and Exchange Commission investigations.

“But that’s only the beginning of the consequences," said Hermanson, co-author of the study. "The repercussions go on to affect employees, stockholders and board members.”

Hermanson compared companies investigated for fraud with those that were not.

“We found that 25 percent of the companies under investigation for accounting fraud had abnormal stock declines (an average of 17 percent) within two days of the fraud announcement,” he said. “Twenty-eight percent of the alleged fraud companies went bankrupt or had to liquidate assets within two years, and 47 percent of these companies were de-listed from a stock exchange, which impacted both the company’s reputation and access to capital.”

The Treadway Commission has published fraudulent accounting data studies for three decades in an effort to better understand and to help reduce corporate accounting fraud.

The latest study showed a spike in money involved in the cases.