The Business Press Is a Watchdog that Bites

When financial fraud is at stake, the press is a watchdog that bites more often than we think, says HBS professor Gregory S. Miller, an expert in financial communication. Many times, the press is on the case long before analysts or even the SEC. In this Q&A he describes what he learned and what managers should keep in mind. Key concepts include:
  • The press is a very early source for uncovering accounting malfeasance. Specialized analytical skills are strong in the business and trade press.
  • When an article based on original research is published, the market response is huge.
  • The press spends more energy examining big-name companies or small companies with a "dirty laundry" angle.
  • Try to develop a good relationship with the press over time. "No comment" is not the best option.
by Martha Lagace

When tales of financial fraud hit the newsstands, business people and academics usually assume that it was analysts or auditors who brought the wrongdoing to light. Journalists, they believe, are only repeating what they've been told.

That's a misunderstanding Gregory Miller would like to clear up. Miller, an HBS professor with expertise in financial communication, conducted in-depth research on whether and how the press digs up original information on accounting malfeasance—with surprising results.

"The press is important in uncovering these things, they uncover a third of them in advance, and they even create the original information in a large percentage of the situations. Often, the press is way out there before the SEC," explains Miller.

His wide-ranging survey of press outlets found no evidence to support the common criticism that coverage of errant firms is influenced by advertising revenue. On the other hand, he detected clear bias in the types of companies that the press targets for special scrutiny.

For this reason, business people are wise not to underestimate the ability of the press—particularly the specialized business press and trade publications, he says. "The press provides new and original information. A lot of people didn't expect that. People in the press did. But most other people really are surprised to see that because they think of the press as repeaters and not as creators." His paper, "The Press as a Watchdog for Accounting Fraud," is published in the December 2006 Journal of Accounting Research.

Miller, whose favorite non-academic business reading includes the Wall Street Journal, the Financial Times, and the investor relations magazine IR, recently talked with HBS Working Knowledge about the implications of his work.

Martha Lagace: Why study the press? Why is it important to understand its role?

Gregory Miller: I first ran across this question in the classroom when I was teaching cases on standard accounting issues and technical accounting questions. As with all cases you want to put them into the broader perspectives so students can understand everything that's happening. One of those cases was actually on financial fraud at Bausch & Lomb, a fraud uncovered by the press in a lot of detail. Another situation was Intel with their Pentium recall. Press coverage forced Intel to do the recall.

I wanted to be able to tell students how typical this is and what happens. But there was no literature. We've got huge literature on analysts and auditors, and I assumed there would be a huge literature on the press. But it just wasn't there—which was amazing to me when I think of how many studies we do as academics that rely on using the press. The more interactions I had with managers convinced me that they're always thinking about the press. So everybody's thinking about it, but we know nothing about it, as academics we couldn't say anything systematic about it, and we didn't really understand what it does.

When I presented early versions of this paper, people just couldn't believe the press could actually uncover accounting malfeasance. Of all the papers I've written, this was the one where I had to do the most to convince people of what I found. It was just completely outside of the box. As academics, a lot of us had in our mind that while the press is out there, it's the analysts—who are the people that we train—and the investors—who are the people that we interact with—who really uncover information.

One of the reasons we haven't studied it more is that it's a lot harder to study. With press research, you see in my article that almost everything was hand-collected.

Q: What did you find?

A: The first important finding in the paper is that the press uncovers accounting malfeasance and that they are a very early source. And that's something that I couldn't tell my students before and other researchers didn't know. In about 29 percent of the cases, the press is way out there before the SEC. And in some cases, people just ignore early warnings. Everybody says, "Where was the press?" It was just amazing to me to see how many times the press wrote, "We just don't get it, there's a problem here." But it just doesn't get picked up in the sea of all the other information that's out there.

When I presented early versions of this paper, people just couldn't believe that the press could actually do this.

The second set of questions was: How is the press actually doing this? Are they getting the information themselves? The press was actually generating the idea that there was an issue. That doesn't mean that they break into a company overnight and figure it out; but a lot of the evidence seems to show that they're out there talking with suppliers and people who work in this field, and they develop such knowledge of these companies that they start to get a sense of something that's not right and then they follow up. In over a third of these situations it appears that the press did the legwork, whether through private tips from somebody in the company, through suppliers or customers at trade shows saying something was weird, or through tracking the names of people who had been involved in fraud in the past and finding another company they're in.

The press's next most frequent source was analysts. As academics we've relied so heavily on analysts, but it's not clear that the analysts were actually uncovering fraud. In the twenty-some situations where an analyst was a source, only four or five identified a problem in writing in advance of the fraud.

Market tests showed that in the situations where it appears the press is the first source, there's a huge market response to the article: negative 10, negative 12 percent. These just dwarf most responses we see in research.

But where the press is repeating somebody else, the market effectively doesn't respond. And so to me the biggest thing in the paper is the fact that the press is actually providing new and original information. A lot of people didn't expect that. People in the press did. But most other people really are surprised to see that because they think of the press as repeaters and not as creators.

The third question—who gets covered—is really important because of the first two. If we say the press is important in uncovering these things, they uncover a third of them in advance, and they even create the original information in a large percentage of the situations, you start to say, wow, they really provide an important function in society, they are an important information intermediary. And when you talk to a lot of people in the press, they really push this: "We defend the common man," etc.

But there is real bias in whom they cover. They pursue big companies everybody cares about or small companies if they can tell the story in an interesting way. And of course the jackpot is if it's a big company about which they can tell the story in an interesting way.

It also is clear that they cover stories that are easier to identify. One of the variables that came through amazingly strongly is, the more people that were involved in a fraud, the more likely it was to end up in a press article early. The more people that are involved, the more people may be able to observe something funny going on as well. That shows when there's lower cost, the press is more likely to do this—which makes a lot of sense, but still is a good thing to know. It says the whistleblower laws we've been trying to support recently in Sarbanes-Oxley make a lot of sense.

Many people say the press might be conflicted by pressures from advertisers. We see conflict a lot with analysts so people were expecting a parallel in the literature. I found absolutely no support for it. And I beat that variable up because people believed that I should find support and I had to convince them there was nothing there. That doesn't mean there aren't individual outlets that are biased. What it means is that when we look at the press as a whole, because there are so many reporters and so many outlets, it does not appear that advertising money biases coverage—which I think was a cool result and different from the conflict we've seen with analysts, for instance.

Q: You found that the press published articles on accounting fraud—prior to a public acknowledgement by the firm or the SEC—in 29 percent of the situations. Does 29 percent seem high or low?

A: One of the other holes in the literature has been that it's not clear who it is that identifies frauds in general. To me, 29 percent seemed very high. To see that large of a proportion coming from one information intermediary convinces me that it's not an accident; this is something they are systematically doing. Frauds are difficult to identify in general.

Some people would look at that and say, "They only find 29 percent of the frauds? Why are they missing so many?" I think when you see how hard it is to identify a fraud—I'm impressed. It's certainly a user-can-decide number.

Q: What proportion of frauds do you think is being missed?

A: I have no idea. And if I did, I would figure out a way to systemize that and share it with the SEC so they could do a better job. This is one of the fundamental problems in doing research about ex-post frauds. We never know how many people did the exact same thing but because other circumstances worked out for them, it never came out.

Q: You analyzed print press, but would you have different results by analyzing TV, radio, blogs, and online news?

A: I think it's unlikely for TV or radio or even the online news because they source so much from the print press.

The blogs are a really interesting question. I know there's been some work done in political science looking at whether blogs are creating news. In my field there are some blogs by highly technical individuals—in some cases who also happen to be analysts—that really dig into accounting issues. I look at some of those before a given class to see if there's anything interesting that they are bringing up right now. And some of them will make allegations. They'll write, "You know, this came up with somebody else in the industry; we looked at these three or four other companies and we think there's potential for fraud there." I would love to dig into the blogs and figure out how much of what they're doing is noise and how much is informative. We don't know the answer.

Q: What would you tell journalists about this work?

A: This is evidence of the fact that they really do fulfill an important role, particularly in the business press. A lot of non-business press journalists don't always think as highly of the business press because it's been a trade press in the past. But the analytical skill set that's developed in the last fifteen or twenty years amongst business press journalists is amazing.

Many reporters I've talked with seem to think their skill as a reporter is being a writer. And I think what this shows is that by specializing and developing an analytical skill set, they can switch from being a repeater of stories to a creator of stories.

Q: What would you emphasize to managers and executives?

A: This paper's a threat to managers more than anything else. You've got somebody looking at you; don't underestimate them. A lot of managers say very derogatory things about the press—they think that they're not very bright; yet we can see that they dig stuff up and deal with highly technical information. The whole point of the paper is that they're watchdogs.

When we look at the press as a whole, because there are so many reporters and so many outlets, it does not appear that advertising money biases coverage.

Beyond that, in my course and in some of my other work I spend a lot of time on relationships with the press, and I would say, "Think about the fact that the press is going to be there whether you like it or not." So you might as well develop a good relationship. That means don't try to spin things to them, don't try to use them; rather be honest with them. It's OK to say, "I don't have a comment on that right now," but make sure you're judicious in the use of that.

Another tip: There's always going to be someone in the press looking to put out negative spin. If you've developed a good relationship over time, then you've got people who really understand the company. So if somebody puts out negative spin that's not correct, there's going to be enough other press out there to counter that. But if you only go to the press when you feel like you've already been treated negatively, why should they believe you and take your side?

Q: Has your research changed how you read articles?

A: I read the Wall Street Journal and the Financial Times—at least scan them every day. British reporting is different from U.S. reporting, and I love to see if there's something that I care about—a company I've written a case on or an issue that I've covered—and I love to compare the articles and see what they share and what's different.

I also really like IR magazine, which is a trade publication but does a phenomenal job of covering financial communication in an expert manner.

One of the appreciations that I got out of this research that I hadn't understood was the importance of the specialized press in certain industries. It was surprising to me how many of the frauds came up through that specialized press. When I'm writing a case in an area now, I find out what the top trade publications are and I'll read a year's worth of each one to really get the background and the feel.

On the one hand, I view the press as a much richer source of information. On the other hand, I want to see multiple versions of a story in order to be able to sort out what the framing is and what the real issue is.

Q: What's next for you?

A: This is part of an overall study in financial communication. In the financial communication framework I use, there's information content that starts with what managers are going to tell people about and how they are going to do so: press releases, conference calls, etc. I have begun to see the important role of information intermediaries, and the press is one component. I will do more work on the press, expanding what the press does, the role it plays in society, who the press chooses to cover: I have a project in process looking at that.

I've also been looking heavily at the role of the various stakeholder groups—how they influence things and the importance of visibility for a firm. I'm also working on the role of managerial credibility. I view all of this as a continuum of how to communicate.

About the Author

Martha Lagace is senior editor of Working Knowledge.