How Media Bias Fuels ‘Blame the Auditor’ Perceptions in Corporate Fraud

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A good morality tale needs a colourful villain. In financial tales this role is usually filled by a wealthy CEO who lives in a large mansion, with an art collection, super car and maybe a yacht and a private plane. Often they are ill tempered, and treat employees badly, like the one described here: “The CEO showed disdain for those over whom he had power. On business trips he stayed in resorts while subordinates holed up in cheap hotels. An employee was assigned to daily remove his shoes, shine them, put them back on his feet and pull up his socks.” 

This example isn’t from a film or a novel. It's a media characterization of the CEO of the now defunct soft drink company Le-Nature, who is currently serving out a 20 year prison sentence for his role in an $874 million accounting fraud case involving his company. According to court records, the CEO diverted millions of dollars of company funds to purchase watches and jewellery, and build a 24,000-square-foot castle.

How could the firm’s auditors have missed such a significant and apparently systematic misappropriation of funds? Shouldn’t the CEO’s extravagant personal spending have made them suspicious?

A new research study co-authored by CEIBS Vice President and Dean and Cathay Capital Chair Professor in Accounting Ding Yuan explores this question by examining the expectation gap between an auditor’s actual duties, and the public perception of their role. The researchers analysed press articles covering 40 US corporate fraud cases discovered between 1992 and 2011 and compared the auditor’s duties, as described by auditing standards, with the description of the fraud cases as reported in the media. Their findings show that the public is highly influenced by media reports of fraud cases, which tend to spin the facts into dramatic tales that highlight subjective factors such as the flamboyant lifestyles and personality traits of CEOs engaged in the frauds, rather than the technical aspects that auditors are focussed on examining. Stories that emphasize the “evilness” of the fraudulent managers help sell newspapers, however the researchers found that these stories usually imply that, based on the managers’ behaviours, the auditors should have been aware of the fraud. The researchers concluded that while there may be room to improve existing auditing standards and the technical and ethical levels of practicing auditors, it will be challenging if not impossible to reduce the unreasonable expectations that the public has regarding the actual abilities and responsibilities of auditors to prevent corporate fraud, because of the biased way in which the cases are reported in the media.

The results of the study appear in the paper titled “Media Bias and the Persistence of the Expectation Gap: An Analysis of Press Articles on Corporate Fraud” which is forthcoming in the Journal of Business Ethics. In addition to Dean Ding Yuan, the paper is co-authored by Jeffrey Cohen of Carroll School of Management at Boston College, and Cédric Lesage and Hervé Stolowy of HEC Paris.

Read the paper here

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