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    PREDICTING THE RISK OF FRAUD IN EQUITY CROWDFUNDING OFFERS AND ASSESSING THE WISDOM OF THE CROWD

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    Genre
    Thesis/Dissertation
    Date
    2019
    Author
    Cabarle, Carla
    Advisor
    Basu, Sudipta, 1965-
    Committee member
    Krishnan, Jayanthi
    Mao, Connie X.
    Gong, Jing
    Department
    Business Administration/Accounting
    Subject
    Accounting
    Finance
    Benford's Law
    Equity Crowdfunding
    Financial Statement Fraud
    Fraud Triangle
    Regulation Crowdfunding
    Permanent link to this record
    http://hdl.handle.net/20.500.12613/2652
    
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    DOI
    http://dx.doi.org/10.34944/dspace/2634
    Abstract
    Regulation Crowdfunding, enacted in May 2016, is intended to facilitate capital formation in startups and small businesses funded primarily by small investors (Securities and Exchange Commission (SEC), 2016b). This dissertation investigates (1) the risk of fraud in equity crowdfunding offerings and (2) whether investors respond to fraud signals by selecting (rejecting) offers with low (high) fraud risk. Because equity crowdfunding is quite new, no frauds have yet been identified. Therefore, I employ a predictive analytics tool, Benford’s Law, to assess the fraud risk of the offering. I select observable indicators to represent the Fraud Triangle dimensions—incentives, opportunities and rationalization—and test if they predict fraud risk. I also compare offer funding outcomes to my fraud risk assessments to identify if investors’ selections consider fraud risk appropriately. The relaxed auditor assurance and disclosure requirements attracts both honest and dishonest founders, but I find that the risk of fraud is higher in equity crowdfunding offers than in public offerings as reported by other studies. I find that there are several individual fraud indicators and models that explain fraud risk, but these do not predict whether the offer is funded or not (funding outcomes) or the amount that is raised if funded. This dissertation is the first to apply Benford’s Law to equity crowdfunding offers and map fraud attributes to fraud risk and funding outcomes. My dissertation can inform investors, issuers, regulators, intermediaries and practitioners of the high risk of fraud in equity crowdfunding offerings and of several noteworthy fraud indicators.
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