P-01 Financial reporting fraud: How merger and acquisition complexity provide greater opportunities for CEOs to engage in wrongdoing

Buller Hall Hallways

Using mergers and acquisitions (M&As) as a proxy to increase organizational complexity, we build upon Schnatterly et al.’s (2018) framework to addresses the gap in the management literature relating to how major firm disruptions, such as M&As, provide greater opportunities to entrenched CEOs for financial statement fraud due to higher levels of complexity. We extend the research on complexity-based information asymmetries (Ndofor et al. 2015) by empirically investigating whether accounting fraud is linked to M&As using a diverse set of variables. We propose the complex nature of M&A transactions result in higher information asymmetry, which provides a “veil” for self-interested CEOs who have an information advantage to engage in financial statement fraud. Comparing fraud firms with non-fraud firms during 1991-2016, we find evidence that fraud firms are more likely to be associated with M&As as compared to non-fraud firms using the Entrophy Balancing Method (EBM). We show similar results in Propensity Score Matching (PSM) analyses which controls for potential endogeneity to engage in M&As. Further analyses show that positive relationships between financial reporting fraud and M&As are more pronounced in more complex M&A transactions and that the positive relationship between M&As and frauds is more pronounced in M&As of a public target, stock-financed M&As, diversified M&As, larger M&As, multiple M&As, and M&As advised by investment bankers. These results also show that the positive relationship between reporting fraud and M&As is moderated post Sarbanes Oxley (SOX), for acquiring firms that engage Big N auditors and for firms with long tenured CEOs.