How to Select Targets for Investigations? Evidence from Financial Reporting Enforcement
Final Report Abstract
The research project examines the effectiveness and efficiency of different selection mechanisms in financial reporting enforcement. It focuses on whether risk-based or random selection methods are more effective in uncovering cases of misreporting and encouraging compliance with regulations. The analysis is based on proprietary data from the German financial supervisory authority (BaFin) on investigations of publicly listed companies. The project aims to identify systemic weaknesses and opportunities for improvement in financial reporting enforcement and to provide actionable recommendations for regulatory authorities. The findings indicate that while risk-based selection methods are more efficient, they identify only a small fraction of misreporting cases. Random selection, on the other hand, uncovers more cases and strengthens the deterrent effect of enforcement regimes. Our analysis demonstrates that random investigations not only detect severe violations but also significantly reduce the likelihood of future misreporting. The combination of risk-based and random investigations proves particularly effective, as it increases detection rates while bolstering confidence in the integrity of financial markets. Additionally, random investigations can be conducted at moderate direct and regulatory costs, emphasizing their attractiveness as a complement to existing oversight mechanisms. This research provides valuable insights for optimizing regulatory mechanisms and bolstering public trust in financial markets. In light of scandals such as the Wirecard case, the findings highlight the importance of incorporating random checks into existing oversight systems. These checks help mitigate systemic risks, enhance transparency, and strengthen public confidence in financial reporting. The insights from this research could also serve as a blueprint for reforms in other countries facing similar challenges in financial supervision. By reinforcing compliance and reducing risks, the study contributes to the stability and transparency of global financial markets.
Publications
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How to Select Targets for Investigations? Evidence from Financial Reporting Enforcement. Available at SSRN
Gros, Marius F.; Nienhaus, Martin; Oehler, Christopher & Schott, Alicia
