Keeping Up with the Joneses: A Model and a Test of Collective Accounting Fraud

22 Pages Posted: 28 Dec 2009

See all articles by Nuno Fernandes

Nuno Fernandes

University of Navarra, IESE Business School; European Corporate Governance Institute (ECGI)

José Guedes

affiliation not provided to SSRN

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Abstract

The incentive and need effects on collective fraud are examined empirically by relating proxies of the aggregate incidence of accounting fraud to expected and realised GDP growth rates. The results unambiguously support the predicted influence of macroeconomic performance. This paper explains the variations in incidence of accounting fraud across economic settings by putting the behaviour and motivation of managers under the microscope. To safeguard their reputation in the managerial labour market, managers of firms that perform poorly are prone to fraudulently inflate earnings if they expect the economy to be strong, since that raises the likelihood of peers reporting high performance. A realised level of economic activity, on the other hand, counteracts this tendency on the part of managers to overstate earnings, by reducing the number of firms that actually perform poorly. We term these two effects the incentive effect and the need effect, respectively. The two effects yield a distinctive relationship between the incidence of accounting fraud and macroeconomic conditions. Specifically, the fraction of firms fraudulently over-reporting earnings is positively related to expected economic performance and negatively related to realised economic performance.

The incentive and need effects on collective fraud are examined empirically by relating proxies of the aggregate incidence of accounting fraud to expected and realised GDP growth rates. The results unambiguously support the predicted influence of macroeconomic performance.

Suggested Citation

Fernandes, Nuno and Guedes, José, Keeping Up with the Joneses: A Model and a Test of Collective Accounting Fraud. European Financial Management, Vol. 16, No. 1, pp. 72-93, January 2010, Available at SSRN: https://ssrn.com/abstract=1527933 or http://dx.doi.org/10.1111/j.1468-036X.2009.00494.x

Nuno Fernandes

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

José Guedes

affiliation not provided to SSRN

No Address Available

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