Accounting Conservatism in Fraud Firms: An Empirical Investigation

Abstract

We examine whether Ball and Shivakumar (2006) and Basu (1997) models of conservatism identify fraud firms as anti-conservative. We show that both models do so to some extent, but Ball and Shivakumar model results are stronger. We further show that these results are driven by firms committing largest frauds as a percentage of firms' assets. Our results are important to academics who use conservatism measures in their studies, and to policy makers who seek to assess usefulness of conservatism to capital markets.