Do Credit Rating Agencies Detect Accounting Frauds?

Accounting fraud imposes severe costs on firms and their stakeholders. Firms at which fraud occurs often have inefficient resource allocation and face higher cost of capital and regulatory penalties. While shareholders suffer the brunt of these damages, frauds can also affect debtholders when firms miss contractual payments or declare bankruptcy. Credit rating agencies traditionally act as gatekeepers for debtholders, but their role and responsibility in detecting accounting fraud remain an open question.

On the one hand, credit rating agencies are in a unique position to detect accounting fraud. First, they have access to non-public information. While the SEC’s Regulation Fair … Read more