“Financial Reporting Quality in Corrupt Firms: Evidence from the Foreign Corrupt Practices Act” by Ms. Mengjie HUANG
Ms. Mengjie HUANG
Ph.D. Candidate in Accounting
Simon Business School
University of Rochester
I study the dynamics between corporate corruption and financial reporting decisions. Using a hand-collected sample of U.S. public firms prosecuted for violations of the Foreign Corrupt Practices Act, I document that corrupt firms exhibit lower financial reporting quality during corrupt years. I examine three channels through which corruption and financial reporting quality interact with each other. First, corrupt firms manipulate accounting numbers to cover up bribe payments and benefits obtained, and change reporting behavior to reduce the likelihood of bribery detection. Second, weak internal accounting information systems create opportunities for corruption. Finally, ethics and integrity in conducting business transactions are likely to translate into financial reporting integrity. In addition, I find that investor perception of financial reporting credibility is lower for corrupt firms. Taken together, my results provide new evidence on the two-way interactions between accounting information and real decisions. My study also provides insights on the role of business ethics in the production of financial information.