If the business press is the public’s watchdog on corporate fraud, there seems to be cause for concern.
A new Harvard study on “watchdog” business reporting—the first of its kind—details how rarely the financial press uncovers wrongdoing on its own. How rarely?
In the December 2006 issue of the Journal of Accounting Research, one of our favorites here at The Audit, after Guns & Ammo, Professor Gregory Miller measures the frequency with which journalists beat the Securities and Exchange Commission (SEC) at uncovering accounting fraud. It’s worth noting that by “beat” the professor simply means breaking the news of the alleged wrongdoing, not necessarily discovering it.
And while beating the SEC to an investigation is like beating Porky the Pig in a bicycle race up the Alps, we concede it’s not nothing.
In the piece, the first of what Miller says will be several research papers exploring the press’s role as a monitor of corporate malfeasance, he looks at which journalists most frequently accomplish this feat, what outlets they work for, who their sources are, and, finally, what impact their work has on the stock market. The answers Miller produced aren’t so much surprising as unprecedented, representing one of the most extensive attempts to audit business press performance. In order to get at the question of who barked first, he compares SEC “enforcement releases” alleging fraud with the results of an electronic archive search of nearly 8,000 publications, including wires, magazines, newspapers, and trade publications. Given the exploratory nature of the work, Miller resists the temptation to criticize or compliment contemporary journalism, leaving it to readers to decide. (Sort of like Fox News!)
We’re readers, by Odin’s beard, and so we shall!
Of the 263 cases of accounting fraud confirmed by the SEC between 1987 and 2002, almost a third—seventy-five cases—were alleged by the press before any official announcement from either the company or the SEC.
But before business reporters start slapping one another on the back, please note that the majority of these cases feature information either gift-wrapped by analysts or else dragged into the public realm by legal proceedings such as a shareholder lawsuit. Overall, Miller finds that most of the time when journalists “beat” the SEC, they are just doing the basics, “rebroadcasting” analysts’ research or covering the courts, as opposed to purposefully smoking out white-collar varmints.
And then one might consider that the entire business press—including Women’s Wear Daily—smokes out evildoers at a rate of five companies per year. There are more than 5,000 public companies in the U.S. If I’m a crooked CEO, I like those odds.
Truly extraordinary reporting endeavors are even more rare in this study, comprising just over 10 percent of all cases. These feature “reporter-based analysis,” which Miller describes as “the use of largely non-public sources to generate original information,” otherwise known as super-reporting of the kind one hopes would guarantee awards and inspire J-school case studies, maybe even a pulp novel character. For example, in the mid-1990s, San Francisco Chronicle columnist Herb Greenberg noticed a curious ad pushing specialized computer equipment at liquidation prices. Only a number was listed, so Greenberg dialed it and reached a Silicon Valley company that, upon further investigation, was double-talking: quietly liquidating a line of business while loudly issuing public statements of strong performance.
On average, share prices drop 12.6 percent in cases, like Greenberg’s, where the press introduces new and exclusive information, while stories based on information already in the public realm is met with “effectively no response” on the major stock exchanges, Miller says.
Moving from the industry level to a discussion of specific outlets and reporters, it’s perhaps not surprising that the publication family found to perform like gangbusters is The Wall Street Journal and Dow Jones News Service. They wrote fourteen stories alleging improper accounting at companies before the SEC announced an investigation; that’s more than twice the number of any single publication or two other publications combined. The San Francisco Chronicle was the surprise runner-up, with six, though that number may be misleading since Greenberg, the tireless former six-day-a-week columnist, is responsible for five of these and is the only reporter in the study found to have multiple kills. But before bookmarking Greenberg’s blog and subscribing to the Journal, consider that at this more detailed level of analysis Miller doesn’t distinguish between new and old information. It’s not known, for example, how many of the Journal’s fourteen SEC-beating stories were based on original investigation and what number were merely rehashed legal documents already digested by the market and reflected in stock prices.
Bringing up the rear was The New York Times, which according to Miller caught just one corporate fish not already in the SEC’s barrel between 1987 and 2002. But that’s almost certainly an understated figure because Factiva, the search engine Miller used to monitor coverage, had only a “90 day rolling archive” of Times stories when the research was conducted. “That said, we should have picked it up if another reporter picked up the story—so while the attribution may be incorrect the overall coverage would not be skewed,” Miller says. He also maintains that if he did the study again using a full Times archive, the paper would probably rank poorly compared to national business publications like BusinessWeek, basing his supposition on a generally lackluster performance by all “nonbusiness national publications” in this study. In fact, the Times and USA Today were the only such publications to ever outpace the SEC, each recording one triumph. Meanwhile, twenty-nine of the seventy-five total cases where the press trumped the SEC come from dedicated “business publications” such as the Journal, twenty-three are from “local market” publications such as the Miami Herald, fourteen are from wires, and seven are from trade publications.
In his final and most intricate level of analysis, Miller discusses the journalist most likely to uncover fraud. Like a sports writer calculating the average size of a Major League home run champ (6-3, 218 according to Baseball Digest), he tallies the professional dimensions of a winning muckraker, a person occupationally positioned to out crooks. According to the study, such a journalist writes a column for a national business publication, strives to provide deep analysis, and pulls it off with expertise, analyst contacts, and a habit of original reporting. Basically, Marketplace columnist Herb Greenberg incarnate: “I personally do the reporting…on every story I write,” Greenberg explained in a blog post last summer. “Sometimes that is simply finding disclosures in SEC filings; other times it is interviewing former employees, competitors and suppliers to a company.”
Of course, such a study is not without ITS limitations. For one, the SEC enforcement press releases used to build the sample are not necessarily reliable or consistent, and are potentially misleading. Some market watchers argue that the SEC only issues press releases for high-profile cases likely to enhance its stature, while most agree that its statements tend to represent only “egregious violations.” If true, then the sample is biased toward extreme or interesting infractions that can’t be used to measure typical press performance. And there’s a second possibility: an article from the early 1990s quotes an SEC official saying that approximately one-third of its leads come from the financial press. If so, then the sample is circular, understating the interconnection between press and government watchdogs.
But perhaps the biggest limitation is the lack of “Big Picture” data, some of which is unknowable, according to Miller. We need an estimate of how many public companies are engaged in fraud (10 percent of 5,000 companies? 20 percent?) for us to evaluate the success of the business press in uncovering it. Nor can we determine whether this study’s major finding—that journalists beat the SEC in uncovering fraud 29 percent of the time, 10 percent of the time with original analysis—is grounds for praise. In addition, we need to know the rate of reporter misfires as well as hits to truly have a sense of marksmanship and vigilance. Miller’s work is interesting, but without all this information we can’t truly hold business journalists to account.
Tony Dokoupil co-authors the Research Report column for CJR. He’s a Ph.D. candidate in communications at Columbia’s Graduate School of Journalism.