Antecedents of Financial Corruption in Organizations

Abstract

Implications of prior research suggest that social-control agents (e.g., boards of directors, external auditors) deter managers from financial reporting violations because of fraud and error. However, existing theory does not adequately explain financial reporting violations because of financial corruption. Laboratory research on unethical behavior shows that implications of prior research on financial reporting violations may not extend to violations because of financial corruption. Corruption in organizations has substantial adverse impact on the integrity and development of market economies. My study is unique by incorporating important perspectives not addressed in prior research. Building on multiple existing theories, I develop a theoretical model of antecedents of financial corruption in organizations that offers novel insights into our knowledge about antecedents of financial corruption in publicly-traded firms. I reviewed 2,585 Accounting and Auditing Enforcement Releases available from the US Securities and Exchange Commission to identify financially corrupt firms. To test my hypotheses, I employed a matched sample of 328 firms (164 financially corrupt firms plus 164 compliant firms). I believe this study has theoretical and practical implications that offer important contributions to research on financial corruption.