Financial Accounting & Auditing

Extant knowledge of Ponzi schemes in the accounting and finance literature is mainly anecdotal. The consequence of this is that it is difficult to know what, if anything, can be done to deter these frauds. We seek to fill part of our knowledge gap about Ponzi schemes by providing large-scale evidence based on a sample of 376 Ponzi schemes prosecuted by the SEC between 1988 and 2012. Our evidence indicates that the majority of SEC-prosecuted schemes involve sums that are much lower than those in the highly visible frauds perpetrated by Bernard Madoff and Allen Stanford.

We ask nearly 400 CFOs about the definition and drivers of earnings quality, with a special emphasis on the prevalence and detection of earnings misrepresentation. CFOs believe that the hallmarks of earnings quality are sustainability, absence of one-time items, and backing by actual cash flows. Earnings quality is determined in about equal measure by controllable factors like internal controls and corporate governance, and non-controllable factors like industry membership and macroeconomic conditions.

In 2013, a new law required Indian firms, which satisfied certain size and profitability thresholds, to spend at least 2% of their net income on CSR. We exploit this natural experiment to isolate the shareholder value implications of CSR activities.

This essay analyzes some problems that accounting standard setters confront in erecting barriers to managers bent on boosting their firms' financial reports through financial engineering (FE) activities. It also poses some unsolved research questions regarding interactions between preparers and standard setters. It starts by discussing the history of lease accounting to illustrate the institutional disadvantage of standard setters relative to preparers in their speeds of response.

We investigate the consequences of the "revolving door" for trial lawyers at the SEC's enforcement division. If future job opportunities motivate SEC lawyers to develop and/or showcase their enforcement expertise, then the revolving door phenomenon will promote more aggressive regulatory activity (the "human capital" hypothesis). In contrast, SEC lawyers can relax enforcement efforts in order to develop networking skills and/or curry favor with prospective employers at private law firms (the "rent seeking" hypothesis).

In this paper we address two questions that emerged in the aftermath of the 2008 financial/banking crisis. First, did the financial statements of bank holding companies provide an early warning of their impending distress? Second, were the actions of four key financial intermediaries (short sellers, equity analysts, Standard and Poor's credit ratings and auditors) sensitive to the information in the banks' financial statements about their increased risk and potential distress?

Value stocks earn higher returns than growth stocks on average, but it is well documented that those returns come with risk. This paper supplies an understanding of that risk in terms of fundamentals. The fundamental analysis informs that, in buying value stocks, the investor may be trapped into buying firms where prospective earnings growth is quite risky. However, the trap can be avoided by recognizing how earnings and book value are accounted for in financial statements. Specifically, the application of conservative accounting informs the investor ex ante of the risk involved.

This paper presents a comprehensive analysis of mortgage delinquency between 2004 and 2008 using a unique loan-level dataset from a major national mortgage bank. Our analysis highlights two major problems underlying the mortgage crisis: a heavy reliance on mortgage brokers who tend to originate lower quality loans, and a high prevalence of low-documentation loans—known in the industry as "liars' loans"—which results in information falsification by borrowers.

This paper lays out alternative valuation models and evaluates their features. Three themes underlie the discussion. First, we require that the models be consistent with the theory of finance. Second, valuation involves accounting, so accounting theory as well as finance theory comes into play. Third, valuation models are a tool for practical valuation, so the respective models are judged on how they perform or do not perform (as a practical matter), with the emphasis is on caveat emptor.