Academic journal article Accounting & Taxation

An Empirical Analysis of Market Reaction to Corporate Accounting Malfeasance

Academic journal article Accounting & Taxation

An Empirical Analysis of Market Reaction to Corporate Accounting Malfeasance

Article excerpt

ABSTRACT

This study examines corporate accounting malfeasance from an exploratory and empirical perspective for 100 companies to determine if there is an association between the Jenkins recommendations and SOX requirements and to determine if there are any differences between the internal and external monitoring characteristics of malfeasance and non-malfeasance companies. The exploratory perspective discusses the types of corporate malfeasance and gives an accounting and market dollar impact ($140 and $857 billion respectively) of 100 companies with publicly announced malfeasance and supports previous studies findings that revenue was the most common area of corporate malfeasance and theft was the least. The empirical study examined internal (corporate governance) and external (auditor and financial analysis) monitoring characteristics by matching the malfeasance companies with non-malfeasance companies. This empirical study did not find any significant differences in the monitoring characteristics of the companies even though these characteristics were chosen based on an examination of recommendations/requirements for business reporting for SOX and several accounting committees over the years. Previous studies indicated a difference. The research contributes to contemporary accounting literature by providing a dollar measurement of the accounting and related market impact for malfeasance companies and a systematic investigation testing monitoring characteristics between malfeasance and non-malfeasance companies.

JEL: -M4, M40, M41, M48, M49.

KEYWORDS: Accounting Restatements, Accounting Malfeasance, Corporate Malfeasance, SOX, Jenkins Report, Jenkins Recommendations.

INTRODUCTION

Announced corporate malfeasance has increased significantly since the mid-1990s resulting in a significant increase in the number of previously issued financial statements having to be restated. This has also resulted in increased dissatisfaction with the current financial reporting process by regulators and investors. Arthur Levitt's speech, The "Numbers Game" in 1998 highlighted the Securities and Exchange Commission's (SEC) discontentment with the volume of corporate malfeasance, emphasized the need for reform in the financial reporting arena and called on the accounting profession to help in the reformation process. The Enron and WorldCom accounting scandals in late 2001 and 2002 refueled the reform issue compelling regulatory and political intervention to change the financial/business reporting process with an implied objective that the reforms would reduce or eliminate corporate malfeasance.

Congress' passage of the Sarbanes-Oxley Act of 2002 (SOX) was a direct response to the accounting scandals and an attempt to reform the financial/business reporting process. But there have been several other efforts during the 20th century to reform or improve the financial reporting process due to misleading or fraudulent financial reporting: the Special Committee on Co-operation with Stock Exchanges of the American Institute of Accountants during the early 1930s (Storey 1964) in response to the stock market crash of 1929; the National Commission on Fraudulent Financial Reporting formed in 1985, chaired by James C. Treadway (the Treadway Commission), (Minter 2002); etc. In 1991 the American Institute of Certified Public Accountants (AICPA) formed the Special Committee on Financial Reporting, later deemed the Jenkins' Committee since it was chaired by Edmund Jenkins, then a partner in Arthur Andersen. The Jenkins' Committee report, Improving Business Reporting-A Customer Focus; Meeting the Information Needs of Investors and Creditors (AICPA 1 994), is considered the most comprehensive study on user needs for business reporting information and continues to be utilized today. Several of the Jenkins' Committee recommendations were included in the Enhanced Business Reporting Consortium's (EBRC) proposed business reporting framework (ERBC 2005) and the SOX legislation (SOX 2002). …

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