Internal Control over Financial Reporting and Mortgage Fraud
Abstract
Mortgage fraud was a leading force behind the 2008 financial crisis. We measure the fraudulent income overstatement at the bank-ZIP Code-year level as the difference in the local growth between reported income in mortgage applications and the income based on IRS data. We find that overstated income is positively associated with banks’ internal control weaknesses over financial reporting and negatively associated with subsequent remediation of such weaknesses. The associations are concentrated among banks that integrate their accounting and operation processes, as proxied by the adoption of an Enterprise Resource Planning system. Finally, using the removal of internal control provisions in the Federal Deposit Insurance Corporation Improvement Act in 2005 as a shock to internal control quality, we find that affected banks experience increased income overstatement on mortgage applications. Data Availability: Data used in this study are available from the public and proprietary sources identified in the article. Access to proprietary data is subject to the relevant providers’ licensing restrictions.
- DOI
- 10.2308/tar-2024-0214
- Pages
- 1-32
- Language
- en
- Sources
- crossref