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Cheating in plain sight: Big, well-known companies are more likely to commit financial fraud

SEC fraud? It probably wasn’t the little guy.

Cheating in plain sight: Big, well-known companies are more likely to commit financial fraud
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Financial securities fraud is not usually, it turns out, a cloak-and-dagger accounting scheme hatched in the closet of a company you’ve never heard of. It’s happening in plain sight, at big-name Fortune 500 companies.

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Researchers from a trio of universities (Washington State, Pennsylvania State, and Miami) studied 250 companies involved in Securities and Exchange Commission fraud filings from 2005 to 2013, and found that Fortune 500 companies were much more likely to have cooked books. Researchers looked closely for predictors of fraud, and found four risk factors :

  • Fortune 500 companies (four times more common than non-Fortune 500 companies)
  • Firms traded on the New York Stock Exchange (two times more likely than those not)
  • Companies with unusually aggressive growth expectations
  • Firms where the CEO also chairs the board

When companies illegally manipulate financial markets in their favor, it’s called securities fraud. Commonly, investors are provided false information.

“Prestigious companies, those that are household names, were actually more prone to engage in financial fraud, which was very surprising,” says lead author Jennifer Schwartz, a sociologist at Washington State University. “We thought it would be companies that were struggling financially, that were nearing bankruptcy, but it was quite the opposite. It was the companies that thought they should be doing better than they were, the ones with strong growth imperatives—those were the firms that were most likely to cheat.”

This study dovetails with a wider push in academic circles to research white-collar crime over other forms of crime. Securities fraud typically has much more devastating impacts than, say, street crime, including large numbers of people losing jobs, stock value, and retirement savings.