An academic study found that big firms rather than smaller, struggling businesses, are more likely to commit financial fraud
In theory, the larger a company is, the more likely it is that wrongdoing would be spotted. That should be a deterrent to bad conduct.
And yet, it is often the largest firms that become embroiled in scandals including financial securities fraud.
A new study from academics at Washington State University, Pennsylvania State University and Miami University found that Fortune 500 firms with strong growth profiles are more likely to ‘cook the books’ than smaller, struggling firms.
Their research examined the characteristics of 250 US public corporations that had been implicated in financial securities fraud according to SEC filings from 2005-2013. They compared them to a sample group of firms that were not.
"Prestigious companies, those that are household names, were actually more prone to engage in financial fraud, which was very surprising," said Jennifer Schwartz, WSU sociologist and lead author on the study. "We thought it would be companies that were struggling financially, that were nearing bankruptcy, but it was quite the opposite. It was the companies that thought they should be doing better than they were, the ones with strong growth imperatives--those were the firms that were most likely to cheat."
The research, published in Justice Quarterly, noted that white-collar crime such as faulty accounting processes and providing false or incomplete information is under-studied, despite the far-reaching consequences.
“What these companies were doing was essentially fudging the numbers, lying to investors, other companies and the SEC,” said Schwartz. “Eventually, you have to make up for the money that was lost, that really never existed, so shareholders lose money, people lose retirement plans, people lose jobs. It’s very, very damaging.”
