Closer Look Series: Financial Manipulation-Words Don’t Lie

Closer Look Series: Topics, Issues and Controversies in Corporate Governance, No. CGRP-07, by David F. Larcker, James Irvin Miller Professor of Accounting, Director of Stanford Graduate School of Business Corporate Governance Research Program, And Brian Tayan, MBA ’03, Stanford GSB, Date: 7-23-2010

• Financial Manipulation: Words Don’t Lie

Reliable financial reporting is critical to the efficiency of capital markets. Despite its importance, managers may have incentive to misrepresent financial results for personal gain.

While academics and professionals have developed models to detect aggressive accounting, these have been met with limited success.Still, there is some evidence that quantitative models may be improved through the application of techniques developed by linguists and psychologists to identify deceptive language and behavior.

Why don’t shareholders and analysts apply these techniques to evaluate the truthfulness of management?

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