Who Blows the Whistle on Corporate Fraud

What external control mechanisms are most effective in detecting corporate fraud? To address this question we study in depth all reported cases of corporate fraud in companies with more than 750 million dollars in assets between 1996 and 2004. We find that fraud detection does not rely on one single mechanism, but on a wide range of, often improbable, actors. Only 6% of the frauds are revealed by the SEC and 14% by the auditors. More important monitors are media (14%), industry regulators (16%), and employees (19%). Before SOX, only 35% of the cases were discovered by actors with an explicit mandate. After SOX, the performance of mandated actors improved, but still account for only slightly more than 50% of the cases. We find that monetary incentives for detection in frauds against the government influence detection without increasing frivolous suits, suggesting gains from extending such incentives to corporate fraud more generally. _____________________________ *Alexander Dyck thanks the Connaught Fund of the University of Toronto and Luigi Zingales the Center For Research on Security Prices, the Stigler Center, and the Initiative on Global Financial Markets at the University of Chicago for financial support. We would like to thank Alexander Phung and Victor Xin for truly outstanding research assistantship. We thank John Donohue, Jay Hartzell, Andrew Metrick, Shiva Rajgopal, Adriano Rampini, and seminar participants at Harvard Business School, Harvard Law School, Michigan Law School, the University of Pennsylvania, the Duke-UNC Corporate Finance Conference, the NBER Summer Institute, the University of Texas Conference on Empirical Legal Studies and the American Finance Association Meetings (2007) for helpful comments.