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Financial Reporting Misconduct

The First Area of Topic

Financial reporting misconduct involves misreporting financial information to potential investors. The most established part of this literature focuses on misreporting by corporations and investment firms. There is also a rich literature on misreporting in structured finance that developed following the 2008–2009 financial crisis as well as a newer literature on misreporting of environmental, social, and governance (ESG) information.

Types of Financial Reporting Misconduct

A.

Corporations and Investment Firms

Corporate misconduct and financial statement manipulation are two of the most prominent forensic finance topics. Highly cited papers in this area include Leuz, Nanda, and Wysocki (2003), who found that investor protections decrease earnings management, and Dyck, Morse, and Zingales (2010), who identified smaller players like employees and media as critical whistleblowers in corporate fraud. Recent trends in this literature examine the contagion of earnings management among peer firms and the impact of corporate culture and CEO incentives on financial misreporting.

B.

Structured Finance

Structured finance, involving debt collected into pools and securitized, was central to the 2008–2009 financial crisis. Post-crisis academic research uncovered extensive misreporting in mortgage-backed securities (MBS), with studies like Piskorski, Seru, and Witkin (2015) revealing significant asset misrepresentation. Further research by Griffin and Maturana (2016) found widespread loan misreporting, highlighting the critical role of forensic finance in understanding and addressing these issues.

C.

Greenwashing

The literature on greenwashing examines discrepancies between firms' or funds' stated ESG objectives and their actual practices. Studies have shown that many ESG funds and firms engage in greenwashing, failing to improve sustainability metrics despite marketing themselves as environmentally conscious. For instance, research has found that a significant portion of ESG funds in the U.S. do not hold portfolios with higher ESG scores or actively vote for ESG proposals, attracting criticism and large inflows despite their misleading practices.

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