Corporate Financial Fraud : An Application of Detection Controlled Estimation

The paper studies corporate fraud and detection, using an empirical framework that models the strategic interdependence between fraud and detection and accounts for the possibility that some fraud is undetected (incomplete detection). The framework first models fraud as a discrete choice and then models the magnitude of fraud. The results find that failure to account for incomplete detection could lead to downward biases in estimating the effects of various factors on the likelihood of fraud. Furthermore, the empirical model in the paper has a number of potential applications