The association between organizational culture and fraudulent financial reporting

Institutional theory stresses the importance of culture on firm behavior. The study focuses on the accounting culture that predisposes a firm to consider fraudulent financial reporting to be an acceptable accounting policy.; Each firm develops accounting rules and procedures that become socially accepted ways of understanding accounting situations within that particular firm. As these decisions-making processes and standard operating routines become institutionalized they take on a rule-like status. Over time they begin to form part of the accounting culture of the firm, which influences subsequent accounting decisions. When a deviant accounting culture evolves, the firm is predisposed to consider illegal financial reporting to be a legitimate accounting policy.; A sample of 80 firms that issued fraudulent financial statements in the five-year period from 1995 to 1999 are matched with an equal number of firms that have not been found guilty of fraudulent reporting.; The results of this study shows that there are four characteristics of an organization's culture that predisposes the firm to consider fraudulent financial reporting to be a legitimate accounting policy decision. Firms that issue fraudulent financial statements are more likely to engage in related party transactions, to have the founders still exerting major influence over the firm, to have fewer professional accountants, and to have prior history of illegal violations.