A selection of interesting articles we found recently looking at what may lie behind corruptive practices.

CEO power and CEO hubris: a prelude to financial misreporting?
The purpose of this paper is to explore how the tension between a firm’s CEO’s power features and externally observable hubris attributes may determine the likelihood of financial misreporting. The analyses are based on a sample of 16 Canadian firms for which there were formal accusations of financial reporting fraud filed by securities regulators, assorted with regulatory sanctions; as well as 16 firms matched on industry and size with no evidence of financial misreporting.

The findings suggest that firms accused of financial misreporting exhibit features of strong CEO power and hubris as reflected in their relations with the self, others and the world. Governance mechanisms do not seem to be effective in detecting or preventing financial misreporting, with independent boards of directors proving especially ineffectual. The findings suggest that formal governance processes may get co-opted by a CEO with hubristic tendencies. While the tentative model is more explanatory than predictive, it opens up a new research area as it brings the concept of hubris into accounting research.

See more at: Denis Cormier, Pascale Lapointe-Antunes & Michel Magnan. 2016. CEO power and CEO hubris: a prelude to financial misreporting?
Management Decision, 54(2), 522 –554.


Entrepreneurial orientation and corruption
Organisational corruption is a wide-spread negative aspect of economic activity, and a seemingly never-ending series of corruption scandals has been made public around the globe. Although research is performed in a broad variety of disciplines, ranging from psychology to management to law, a fully satisfactory explanation for the causes of organisational corruption has not been found.

By looking at organisational factors as potential triggers for corruptive behaviour, this study draws upon the concept of entrepreneurial orientation (EO). Diverse studies have shown that EO, as an antecedent to company performance, has a positive effect. Recent EO literature, however, indicates that EO has not only positive but also negative consequences. In this line of reasoning, this study builds upon principal agent theory and makes a first step in exploring the impact of EO on a negative aspect of business behaviour, namely organisational corruption.

Tobias Karmann and his team gathered survey data and publicly available data from 411 firms, inquiring for both acts of corruption from within the top management team over the last 3 years and the level of entrepreneurial orientation within the organisation. Results show diverging effects along the individual dimensions of EO; they point to risk orientation as the dark side of EO, as it significantly increases the likelihood of corrupt behaviour in companies. In contrast, innovation orientation, to a certain extent, counterbalances by reducing the likelihood of corrupt behavior.

For more detail: Tobias Karmann, René Mauer, Tessa C. Flatten & Malte Brettel. 2016. Entrepreneurial Orientation and Corruption.
Journal of Business Ethics, 133(2), 223-234.


Antecedents and effects of ethical climate fit on attitudes of accounting professionals: A client narcissism and fraud attitude risk
The rash of high-profile accounting frauds involving internal corporate accountants calls into question the individual accountant’s perceptions of the ethical climate within their organisation and the limits to which these professionals will tolerate unethical behavior and/or accept it as the norm. This study uses social cognitive theory to examine the antecedents of individual corporate accountant’s perceived personal fit with their organisation’s ethical climate and empirically tests how these factors impact organisational attitudes.

A survey was completed by 203 corporate accountants to assess their perception of relevant variables. The results of the structural equation model indicate three significant antecedents relating to ethical climate fit: higher internal levels of locus of control; greater numbers of prior job changes; and higher perceptions of an increasingly better fit with the firm’s ethical climate (e.g., fit trend). Our results also indicate that higher levels of perceived fit to the ethical climate of a firm are associated with higher levels of perceived job satisfaction and organisational commitment.

Madeline Domino and her colleagues also theorize that perceptions of an organisation’s ethical climate may be reflections of client narcissism and serve a potential indicator of fraud risk. This is an important topic of study, since current auditing standards call for auditors to examine organisational attitudes toward fraud, but offer minimal guidance in doing so.

Read more at: Madeline Ann Domino, Stephen C. Wingreen & James E. Blanton. 2015. Social Cognitive Theory: The Antecedents and Effects of Ethical Climate Fit on Organizational Attitudes of Corporate Accounting Professionals—A Reflection of Client Narcissism and Fraud Attitude Risk.
Journal of Business Ethics, 131(2), 453-467.


CSR as a strategic shield against costs of earnings management practices
Jennifer Martínez-Ferrero, Shantanu Banerjee & Isabel García-Sánchez highlight how CSR can be strategically used against the negative perception from earnings management (EM). Using international data, they analyse the effect of CSR and EM on the cost of capital and corporate reputation. Results confirm that CSR strategy is positively valued by investors and other stakeholders. Contrary to EM, CSR has a positive effect on corporate reputation and lowers the cost of capital.

In addition, the researchers also find that the favourable effect of CSR on cost of capital is consistently more intense in firms that show signs of EM indicating that the market does not identify when CSR practices are used as a strategy to mask EM. The authors also demonstrate how institutional factors influence the above relationship.

Find more at: Jennifer Martínez-Ferrero, Shantanu Banerjee & Isabel María García-Sánchez. 2016. Corporate Social Responsibility as a Strategic Shield Against Costs of Earnings Management Practices.
Journal of Business Ethics, 133(2), 305-324.


Family control, socioemotional wealth and earnings management in publicly traded firms
Geoffrey Martin, Joanna Tochman Campbell & Luis Gomez-Mejia examine the unique nature of agency problems within publicly traded family firms by investigating the earnings management decision of dominant family owners relative to non-family. To do so, they draw upon literature demonstrating that family owners are loss averse with respect to the family’s socioemotional wealth, or the affective endowment derived from firm ownership and control.

Their theory and findings suggest that potential reputational consequences of earnings management lead family principals to engage in less of this practice relative to non-family firms, and that founder family firms are less likely than non-founder family firms to use earnings management. Moreover, the family-firm effect varies with the firm size, the degree of CEO entrenchment, and the firm’s stock structure. The researchers provide important insights regarding differences between family and non-family principals in the use of unethical accounting practices, thereby extending agency theory and advancing an underdeveloped research area.

Read further at: Geoffrey Martin, Joanna Tochman Campbell & Luis Gomez-Mejia. 2016. Family Control, Socioemotional Wealth and Earnings Management in Publicly Traded Firms.
Journal of Business Ethics, 133(3), 453-469.