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An Analysis of Database Challenges in Financial Misconduct Research

An Analysis of Database Challenges in Financial Misconduct Research. R estatement announcements GAO – Government Accountability Office AA – Audit Analytics Securities class action lawsuits SCAC – Stanford Securities Class Action Clearinghouse

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An Analysis of Database Challenges in Financial Misconduct Research

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  1. An Analysis of Database Challenges in Financial Misconduct Research

  2. Restatement announcements GAO – Government Accountability Office AA– Audit Analytics Securities class action lawsuits SCAC – Stanford Securities Class Action Clearinghouse Administrative proceedings & Litigation releasesthat censure accountants AAER – Accounting and Auditing Enforcement Releases secondary designation assigned by the SEC Databases – misreporting studies

  3. Create a comprehensive database with: • All 1,099 cases (includes 10,415 events) for which the SEC brings an enforcement action for §13(b) violations Books & records and internal control violations (FCPA) 2. Assemble data related to these cases from: • www.sec.gov • www.usdoj.gov • Wolters Kluwer Law & Business Securities electronic library • PACER (court documents) • Lexis-Nexis’ All News and Dow Jones’ Factiva (press releases and articles) 3. Merge in GAO, AA, SCAC, and AAER database events • Which §13(b) violations are included/missed by each database? • What ancillary information is included/missed by each database? Documenting each database’s features

  4. Consider a firm picked up by all 4 databases: Brocade Communications A total of 23 unique event dayswith specific incremental information about Brocade’s financial misrepresentation

  5. Jan 6, 2005: Brocade press release (issued after trading hours) announces its 2001-2003 financial statements will be restated due to improper accounting for stock options Mar 10, 2005: SEC begins an informal inquiry June 10, 2005: SEC begins a formal investigation How can so many dates be relevant?

  6. Brocade makes four restatement announcements… Brocade Communications

  7. Brocade Communications … a class action lawsuit is filed, and settled 3 years later…

  8. Brocade Communications … and the SEC issues 15 different Administrative Proceedings and/or Litigation Releases spanning 5 years

  9. GAO hits 4 of 23 events • AA hits 2 of 23 events

  10. SCAC hits 2 of 23 events

  11. AAER hit rate = 2 of 23 events Both AAERs relate to the SEC’s censure of two former Brocade executives who are CPAs.

  12. Initial revelation dates • GAO and AA identify the initial misconduct date • Brocade’s announcement occurred after the U.S. markets close • First event in SCAC is 4 months after initial revelation • AAERs are 4 YEARS later 2. Scope limitations • Of 23 events, GAO captures 4, AA, SCAC, and AAER capture 2 each 3. Omissions • Only AA misses “same-type” events(unusualby selection) 4. Multiple events per case • All databases have this 5. Extraneous events • Can’t illustrate with a case chosen because it includes a §13(b) 5 Database Features and Brocade

  13. Focusing on one aspect of a complex event

  14. Table 2, Panel A Number of Cases after Integrating Related Events for each Database

  15. Table 2, Panel A Number of Events and Integrated Cases associated with a §13(b) violation

  16. Table 2, Panel A We are concerned with how these databases perform in describing §13(b) violations Important:All comparisons refer ONLY to the subset of events and cases in each database associated with a §13(b) violation

  17. Feature #5: Extraneous cases Table 6, Panel A • NOTsuggesting that extraneous events/cases should be omitted from each database • Documenting the culling process facing researchers who use these databases to study financial misrepresentation

  18. Feature #3b: Omitted Cases (during coverage period) Table 4, Panel B

  19. Feature #2: Scope Limitations Table 3, Panel B • NOT suggesting GAO should include all 4,336 events • But, remember the hazard of considering only the “elephant’s tusk”

  20. Economic Magnitude of Features #2 and #3 (Scope Limitation and Omissions) Table 7, Panel B: Mean market-adj. CAR over all event dates identified in each case

  21. Figure 3: Initial Revelation Date, by Event Type Feature #1: Initial revelation dates

  22. Table 3, Panel A Feature #1: Initial revelation dates

  23. Financial misconduct cases are complex • Scope limitations can affect economic significance inferences • Researchers should look beyond individual databases • High event/case omission rates  contaminated control samples • Ad hoc culling tends to select extreme incidents which yields unrepresentative and biased inferences • Financial misconduct is NOT necessarily fraud • 25% of 13(b) violations do NOT involve fraud charges • 50% for AAERs • 90% for securities class action lawsuits and restatement announcements Lessons

  24. Thank you

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