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Social media platforms are invaluable for connecting companies with their customers, the financial community, and the media. Sharing information on social media can reduce the information asymmetry between companies and their stakeholders in a timely manner.1 However, several factors, including a lack of planning, controls, and training, combined with the unpredictability of online behavior, can expose companies to considerable risk. Our research found that company managers and internal auditors lack sufficient awareness of these risks and should take a more active role in regulating and monitoring social media activity.
Ill-advised social media posts and lax oversight can cause serious damage to a company’s reputation, trigger investigations by regulators, damage long-term relationships, and introduce cybersecurity threats. Of course, companies and individuals can try to be selective about the disclosures they make on social media and avoid tweeting negative information.2 But even positive and well-meaning posts can lead to negative outcomes. In 2012, for example, the U.S. Securities and Exchange Commission (SEC) came down on Netflix CEO Reed Hastings for posting information on his personal Facebook account about the company’s impressive video streaming numbers.3 The day after Hastings’s post, Netflix saw a 700% increase in trading volume and a 20% jump in its share price.4 Although the information Reed posted on Facebook proved accurate, investors who didn’t follow him missed out. In response, the SEC issued new guidelines for social media use: Companies are now required to notify investors in advance about which information channels they plan to use to distribute important information.5
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Despite increased scrutiny, risky online behavior continues to be a big issue. In 2018, for example, Tesla CEO Elon Musk tweeted that the electric car company (whose stock had been performing poorly) was in talks to go private. The market response was swift: By the next day, Tesla’s share price had shot up 11%. The SEC proceeded to charge Musk with making false and misleading statements, which resulted in a 14% drop in the share price.6 Several shareholders sued Tesla and Musk for intentional stock price manipulation.7
Given the inherent risks, companies need to become more disciplined about their social media activities and monitor them more closely.
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1. E. Blankespoor, G.S. Miller, and H.D. White, “The Role of Dissemination in Market Liquidity: Evidence from Firms’ Use of Twitter,” Accounting Review 89, no. 1 (January 2014): 79-112.
2. M.J. Jung, J.P. Naughton, A. Tahoun, et al., “Do Firms Strategically Disseminate? Evidence From Corporate Use of Social Media,” Accounting Review 93, no. 4 (July 2018): 225-252.
3. C. Isidore and D. Goldman, “Netflix Faces SEC Probe Over Facebook Post,” CNN, Dec. 7, 2012, https://money.cnn.com.
4. Per Nasdaq historical data, the closing price of Netflix’s stock (NFLX) on July 2, 2012, was $9.69 per share, with 12.99 million shares traded. Hastings’s social media post was made on July 3, 2012. Markets were closed on the July Fourth holiday. On July 5, 2012, the closing price was $11.67 per share, with 104.22 million trades.
5. “SEC Says Social Media OK for Company Announcements if Investors Are Alerted,” U.S. Securities and Exchange Commission, April 2, 2013.
6. N. Jasinski, “Tesla Stock Sank With Elon Musk’s Tweet Now Under Criminal Investigation,” Barron’s, Sept. 18, 2018, www.barrons.com; and J. Horowitz, “SEC Sues Elon Musk for His Allegedly Misleading Tweets,” CNN, Sept. 28, 2018, https://money.cnn.com.
7. C. Isidore, “Justice Department Looking at Musk Comments About Taking Tesla Private,” CNN, Sept. 18, 2018, https://money.cnn.com.
8. Surveys were distributed to members of The Institute of Internal Auditors through regional chapters. Respondents work in both public (51%) and nonpublic companies (49%) across a variety of industries, including technology, banking, health care, and insurance. More than 60% of respondents are certified internal auditors, and 55% are certified public accountants.
9. C.M. Dennis, “Legal Implications of Employee Social Media Use,” Massachusetts Law Review 93, no. 4 (April 2011): 380-395.
10. A. Cain, “The Social Media Scene: Internal Auditors Can Play a Significant Role in Identifying and Mitigating Their Organization’s Social Networking Risks,” Internal Auditor 69, no. 4 (August 2012): 44-49.
11. “SEC Says Social Media OK.”
12. J.L. Loop and A.G. Malyshev, “How to Manage a Company’s Social Media Presence,” Intellectual Property and Technology Law Journal 25, no. 4 (2013): 3-8.
13. P. Aula, “Social Media, Reputation Risk and Ambient Publicity Management,” Strategy and Leadership 38, no. 6 (November 2010): 43-49; R.M. Alexander and J.K. Gentry, “Using Social Media to Report Financial Results,” Business Horizons 57, no. 2 (March-April 2014): 161-167; and N.L. Cade, “Corporate Social Media: How Two-Way Disclosure Channels Influence Investors,” Accounting, Organizations and Society 68-69 (July 2018): 63-79.
14. “Cybersecurity and the Role of Internal Audit: An Urgent Call to Action,” Deloitte, 2017, www2.deloitte.com.
15. “Social Media: Business Benefits and Security, Governance and Assurance Perspectives,” white paper, ISACA, Rolling Meadows, Illinois, 2010.
16. Loop and Malyshev, “How to Manage,” 3-8.
17. Dennis, “Legal Implications,” 380-395.