Meanwhile, higher CEO’s stock ownership could motivate him to exert more efforts to help the SEC and internal sources detect fraud. Additionally, longer-tenured CEOs or chairman CEOs might not exert enough efforts to enhance their firm’s internal controls or cooperate effectively with the SEC to achieve the goal of fraud detection. It is also evident that bigger and more active audit committees are the most effective board governance mechanism that could help the SEC and internal sources detect fraud.
We find convincing evidence that setting higher SEC’s regulatory budget could help both the SEC and internal sources detect higher number of fraud events going on. Then, we model the expected number of fraud events detected by the SEC and internal sources using a Poisson specification. public financial firms during the period 1980-2007. We utilize the FIRST operational loss database, provided by Algorithmics Inc., to count the number of internal and external fraud events going on and detected in each firm-year in a sample of defrauded U.S. publicly held firms, together with the presence of stronger firm-level corporate governance mechanisms could enhance fraud detection by the SEC and internal sources, namely audit reviews, back office reviews, periodic internal reviews, tightened controls, employers, employees and other firm insiders, in U.S. We do that by empirically examining whether increasing the resources allocated to the SEC, as a main regulatory body primarily responsible for fraud detection in U.S. In this paper, we provide evidence on the effects of the adequacy of regulatory scrutiny practices and strength of corporate governance mechanisms on fraud detection in publicly held financial firms.
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