How those around you feel about gambling may influence the way you report financial information, according to new research by assistant professor of accounting Dane Christensen and his coauthors Keith L. Jones of the University of Kansas and David G. Kenchington of Arizona State University.
Specifically, according the researchers, firms headquartered in places where gambling is more socially acceptable are more likely to need to issue a restatement of earnings after an initial intentional misstatement.
“In places where gambling is more socially acceptable, managers may be more inclined to take speculative and risky positions when reporting firm performance, and may be more likely to find other individuals in the organization who are willing to go along with taking these risks," they noted.
Many other studies have taken on the “incentives/pressure" and “opportunity" aspects of the “fraud triangle," but Christensen and his coauthors attempt to illuminate the less studied third corner of “attitudes/rationalization."
Though the incidence of intentional misreporting is rare—occurring approximately 2 percent of the time—when it does happen, the losses are huge.
“There is so much money that gets lost in these situations—sometimes billions of dollars in wealth is destroyed," Christensen said.
The study used financial information from public firms in the S&P 1500 from the years 1994-2008.
Christensen and his coauthors found that when firms were located in places where people are more comfortable with gambling, firms were 50 percent more likely to intentionally misreport their financial performance.
They also identified and tested four settings where, in addition to being headquartered in areas with more open attitudes toward gambling, the pressure to misreport is greater. These settings were when the firm is:
- close to meeting a benchmark
- experiencing poor financial performance
- under investment-related pressure (or had been in the past)
- investing heavily in risky projects that have a high probability of failure.
In these scenarios, Christensen noted the relationship between gambling attitudes and misreporting is even stronger.
Wealthier areas in gambling-friendly locations also saw an increase in misreporting.
The work caught the attention of the Wall Street Journal and has been accepted for publication in the journal Contemporary Accounting Research.
Christensen said he touches on these themes in his auditing course, asking students to consider what factors they should be attuned to when auditing, and he hopes to do more research in this area.
“It's interesting, and it's challenging," he said.
“We can't mitigate what we don't understand. That's why it's important to get a better understanding the factors contributing to misreporting," he added.
Christensen's current research also includes “Higher Highs and Lower Lows: The Role of Corporate Social Responsibility in CEO Dismissal" with Tim Hubbard of Notre Dame and Scott Graffin of the University of Georgia and published in the current issue of Strategic Management Journal. The study found that when CEOs invest in corporate social responsibility, it appears to amplify the impact that the firm's financial returns have on whether the CEO will be fired.