What are the odds of fraud at a company in a given year?
A new study pegs it at 14.5%.
Click here to read the study by Alexander Dyck, University of Toronto; Adair Morse, University of Chicago, University of California at Berkeley, and the National Bureau of Economics; and, Luigi Zingales, University of Chicago, NBER, & the Center for Economic Policy research.
So if there’s a 14.5% chance of fraud at a company every year, then given enough time, fraud becomes almost a sure thing.
Frauds cost investors within a company an average of 22% of the total enterprise value. And it costs all investors across all companies 3% of enterprise value, the study estimates.
“Until recently, the United States was deemed the corporate governance standard towards which other countries aspired,” the study says. ?The major wave of corporate scandals that emerged at the beginning of the millennium deeply shook this confidence. How was it possible for companies like HealthSouth to falsify its financial statements for 11 years without notice, or WorldCom to transform 3.8 billion of expenses into capital investments, or Enron to allow managers to enrich themselves while hiding billions of liabilities? Do these examples just reflect a few rotten apples, or are they instead the tip of the proverbial iceberg? … If we knew the frequency and cost of frauds this would help investors and boards to tailor resources to mitigate the scope of the problem.”
The study, however, has a slight flaw, beginning with its very first sentence: “We estimate what percentage of firms engage in fraud and the economic cost of fraud.”
Firms don’t’ commit fraud. People hiding within them do.