The above mentions refer to critical steps in the meteoric rise of Micheline Charest, former co-CEO and controlling shareholder of CINAR Corporation (CINAR). CINAR, a media and entertainment company co-founded by Ms. Charest and her husband and co-CEO, Ron Weinberg, was once the darling of the investment community. At its peak, the firm reached a stock market capitalization of $1.9 billion. However, at the pinnacle of Ms. Charest's fame and power, the company started to unravel, getting embroiled in allegations of copyright, tax, financial reporting and cash management cover-ups and frauds in the tens if not hundreds of millions of dollars.
The events at CINAR led to a legal and regulatory saga that, eight years later, is still going on. Through that process, the Charest-Weinberg couple lost their positions, the control of their company, their reputation and, most likely, a significant portion of their fortune.
Inspired by the CINAR story, our paper addresses two related questions. First, why does such a celebrated business figure as Micheline Charest risk her reputation to engage and pursue fraudulent and/or dubious activities? Second, does directors, auditors and regulators help prevent and/or detect financial reporting fraud when they are dealing with successful and highly reputable individuals such as Micheline Charest? Focusing on a sample of fraud cases pursued by securities regulators, our paper addresses both questions in the following ways.
First, from a conceptual perspective, we revisit the fraud triangle which serves as a basis for most fraud investigations, academic or professional. Beyond incentives, opportunity and rationalization, we argue that managerial hubris ignites and accelerates the propensity of senior executives to commit or be oblivious to fraud. The focus on top management is warranted by the fact that they tend to commit the largest frauds which are most likely to affect the reliability of financial statements (Peltier-Rivest, 2007).
Managerial hubris, which reflects one's overconfidence or arrogance, is a concept which is used to describe and explain entrepreneurs' serial failures (Hayward, Shepherd and Griffin, 2006) as well as the overbidding in takeover battles (Hayward and Hambrick, 1997). Second, from a methodological perspective, we measure managerial hubris by relying on a proxy, favorable media or financial markets' attention (Hayward, Rindova and Pollock, 2004). Prior research shows that hubris can be fed and magnified when there is too much self-reflection of success and achievements. Finally, from an empirical perspective, we document the market, management, governance, and industry contexts which underlie corporate frauds and assess the interface between fraud triangle dimensions and proxies for managerial hubris.
The evidence that we provide in the paper is consistent with managerial hubris being a key omitted factor in prior research as a determinant of financial frauds. Like moths attracted to the flames that ultimately kill them, managers under the spotlight will gain in self-assurance and a feeling of invincibility, thus leading them to take more risks in their fraudulent activities.
We focus on the population of financial reporting frauds or improprieties committed in Canadian publicly-traded firms during the 1995-2005 period and which led to the imposition of penalties or fines by the securities regulators. While there may be more cases of alleged fraud or impropriety, we only analyze the cases where fines or penalties were ultimately imposed by securities regulators. Consistent with clinical studies that focus on particular events or transactions (e.g., Fogarty et al., 2008), our methodological approach relies on the exhaustive analysis of media coverage surrounding the firms, regulators' reports and corporate documents (e.g., proxy statements, annual reports).
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