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Leverage, Sanctions, And Deterrence Of Accounting Fraud, Urska Velikonja

Faculty Scholarship

The empirical evidence suggests that firms overpay for fraud liability and overspend on internal compliance mechanisms (which are not very effective at preventing fraud). Yet, insiders who commit fraud are rarely sanctioned for their wrongdoing, which produces moral hazard and individual underdeterrence.
Two factors explain the failure to sanction managers who commit fraud. First, managers control the information revealing who was involved in account fraud and, thus, can impede external investigations and sanctions. Second, managers also influence whether the firm will investigate and sanction accounting fraud internally. Managers’ control over settlement and the availability of directors’ and officers’ insurance further …