Fraud doesn't pay, KSU professor's study finds

The risk that comes with gaming financial reporting requirements isn’t worth the potential…

Georgia (Jun 7, 2010) —  

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http://www.bizjournals.com/atlanta/stories/2010/06/07/newscolumn2.html

The risk that comes with gaming financial reporting requirements isn’t worth the potential fraudulent gain, according to a recent study with a metro Atlanta connection.

Public companies accused of cheating financial reporting laws typically end up severely punished by investors and/or regulators, and in some cases, are cast into bankruptcy, according to a recent study co-authored by a Kennesaw State University professor, Dana Hermanson.

In the study, titled “Fraudulent Financial Reporting: 1998-2007,” Hermanson and three co-authors from two other Southern universities followed 347 alleged incidents of financial fraud.

Cases of financial fraud climbed during the study period by 18 percent compared with the previous 10 years. The study also found the amount of money involved in a fraud soared during the study period to nearly $400 million per case.

News of an alleged fraud resulted in a 17 percent drop in stock price on average within the first two days. Involvement by the Securities and Exchange Commission or the Department of Justice caused shares to dip 7 percent on average.

In 90 percent of alleged frauds, regulators named a company’s CEO or chief financial officer as parties.

The boards of directors for firms that were accused of fraud were largely the same in terms of size, meeting frequency, experience and composition, the study found, to the boards of companies that show no signs of fraud.

“The consequences of fraud are severe, but the results indicate that the accounting fraud problem is not going away,” Hermanson said in a statement. “In fact, the problem has gotten larger and is even more likely to involve the CEO and/or CFO of the company.”

Hermanson’s co-authors included Mark S. Beasley of North Carolina State University, and University of Tennessee professors Joseph V. Carcello and Terry L. Neal.

The board of Habersham Bancorp might be preparing for activity that could boost the trading of its shares.

The parent company of Clarkesville-based Habersham Bank received approval late last month from shareholders that would allow directors to dramatically increase the numbers of the company’s shares or perform a reverse stock split.

Shareholders overwhelmingly approved a measure to amend the company’s articles of incorporation to increase the number of common shares to 50 million from 10 million.

Investors also approved a proposal to allow the board of directors, in its discretion, to perform a reverse stock split that could swap as many as 50 shares for a single share.

The purpose of such a split would be to increase Habersham Bancorp’s (Pink Sheets: HABC) share price and potentially stimulate investor activity, according to the banking company’s proxy filed April 16.

Habersham Bank has $436 million in assets and eight branches in Georgia.

The fallout of the real estate market has shaken Habersham Bank, like many Georgia lenders. Like other Georgia Mountain banks, Habersham Bank lent heavily to builders of vacation homes.

As of first quarter, 35 percent of Habersham Bank’s loan portfolio was either delinquent, in default or in foreclosure, according to Federal Deposit Insurance Corp. data.

Earnings improvement

When the news has been mostly bad, bankers will hang their hats on modest improvements anywhere. According to first quarter Federal Deposit Insurance Corp. data, net interest margin, a key profitability measure, improved for the fifth straight quarter.

The margin was 3.46 percent in the first quarter, up 50 basis points since March 2009. Atlanta Business Chronicle previously reported that nearly six out of 10 Georgia banks eked out a profit for the quarter, the best showing in a year.

Marketing shift

A Marietta wealth management firm is taking a unique approach to its Web presence.

Instead of simply introducing clients to its line of financial services, investment commentary and research (which it still does), Narwhal’s principals have opted to let clients and prospects get a glimpse of their respective passions outside of work.

Narwhal’s redesigned website features the photography and philanthropic work of firm co-founder and President Mark Burton, and a golf blog by Executive Vice President and co-founder MacArther “Mac” R. Plumart.

“When you’re building relationships, you have to know your clients and they have to know you,” Plumart said.

Plumart’s golf blog includes commentary about courses he’s played around the globe, as well as his take on the current state of the world of golf.

Burton’s section features photography from his international travels.

That’s not to say the site is lacking the customary performance data or investment commentary. The firm has also started a financial blog to quickly connect its clients with updated commentary on financial news of the day.

The redesigned site launched in May. The firm has not yet tracked usage to see if the changes are driving new traffic.


 

A leader in innovative teaching and learning, Kennesaw State University offers more than 150 undergraduate, graduate and doctoral degrees to its approximately 41,000 students. With 11 colleges on two metro Atlanta campuses, Kennesaw State is a member of the University System of Georgia and the third-largest university in the state. The university’s vibrant campus culture, diverse population, strong global ties and entrepreneurial spirit draw students from throughout the region and from 92 countries across the globe. Kennesaw State is a Carnegie-designated doctoral research institution (R2), placing it among an elite group of only 6 percent of U.S. colleges and universities with an R1 or R2 status, and one of the 50 largest public institutions in the country. For more information, visit kennesaw.edu

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