“How Pervasive is Corporate Fraud?”

February 2013, ABSTRACT We estimate what percentage of firms engage in fraud and the economic cost of fraud. Our estimates are based on detected frauds, and frauds that we infer are started but are not caught.

Toidentify the ‘iceberg’ of undetected fraud we take advantage of an exogenous shock to the incentives for fraud detection: Arthur Andersen’s demise, which forces companies to change auditors. By assuming that the new auditor will clean house, and examining the change in fraud detection by new auditors, we infer that the probability of a company engaging in a fraud in any given year is 14.5%. We validate the magnitude of this estimate using alternative methods. We estimate that on average corporate fraud costs investors 22 percent of enterprise value in fraudcommitting firms and 3 percent of enterprise value across all firms.


Alexander Dyck
University of Toronto
Adair Morse
University of Chicago, University of California at Berkeley, & NBER
Luigi Zingales*
University of Chicago, NBER, & CEPR


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