In an ideal situation, short sellers are supposed to "keep markets honest". There are specialized hedge funds that trawl through data to seek out companies tha

In an ideal situation, short sellers are supposed to "keep markets honest". There are specialized hedge funds that trawl through data to seek out companies that might be engaging in fraudulent activity. They then investigate those leads. If they find evidence of fraud (ie inflated earnings), they short the stock and the make public the evidence. Obviously the SEC should also be doing this. However, it can be argued that having additional well funded market participants that are financially incentivized to seek out and report fraud is beneficial. On a side note, some of these hedge funds do not immediately announce which company was the subject of their investigation when they report evidence of fraud. This causes a mad scramble of activity amongst companies that were engaging in fraudulent behavior, resulting in more fraud being exposed.