The Great Escape: The Unaddressed Ethical Issue of Investor Responsibility for Corporate Malfeasance

Corporate governance scholarship focuses on executive malfeasance, specifically its antecedents and consequences. Academic efforts primarily focus on prevention while practitioners are often left to hold firms and executives (including directors) accountable through a variety of sanctions. Even so,...

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Bibliographic Details
Published in:Business ethics quarterly 2013-07, Vol.23 (3), p.443-475
Main Authors: Wesley, Curtis L., Ndofor, Hermann Achidi
Format: Article
Language:English
Subjects:
Accountability
Accounting
Benefits
Board of directors
Business structures
Corporate governance
Corporate responsibility
Directors
Equality
Equity
Errors
Executives
Financial management
Financial reporting
Fraud
Investors
Law
Malfeasance
Markets
Net income
Sanctions
Sanctions (international law)
Shareholders
Signals
Social responsibility
Stockholders
Studies
U.S.A
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Summary:Corporate governance scholarship focuses on executive malfeasance, specifically its antecedents and consequences. Academic efforts primarily focus on prevention while practitioners are often left to hold firms and executives (including directors) accountable through a variety of sanctions. Even so, executive malfeasance still occurs even in the face of the vast resources used to monitor, control, and penalize firms and executives. In this paper, we posit equity markets do not adequately penalize firms for inaccurate earnings reports. Using a sample of 129 firms identified by the U.S. General Accounting Office for reporting fraudulent earnings in 10K filings, we found support for our assertion. Consequently, the one party who may benefit but escape accountability is firm shareholders. Moreover, we find little empirical evidence that the subset of firms sanctioned by the SEC is penalized more heavily than the full sample by markets at the time they report and correct their 10K filings. Our results raise serious questions whether such managerial opportunism can be eradicated given the apparent lack of consequences in equity markets for investors. We also question whether the SEC is able to discern between fraud and error in financial reporting and its implications.
ISSN:1052-150X
2153-3326
DOI:10.1017/S1052150X00006370