Featured Research

from universities, journals, and other organizations

Sociological study reflects high financial malfeasance rates in largest US corporations

Date:
June 2, 2010
Source:
American Sociological Association
Summary:
The need to "fix" or restate financial statements is an admission by corporate management that these reports (prior to their being corrected) to the government and the investing public misrepresented the corporations' financial positions, a Texas sociology professor reports in a new research paper.

The need to "fix" or restate financial statements is an admission by corporate management that these reports (prior to their being corrected) to the government and the investing public misrepresented the corporations' financial positions, Texas A&M University sociology professor Harland Prechel reports in a research paper published in the June 2010 issue of the American Sociological Review (ASR).

Prechel and Theresa Morris of Trinity College in Hartford, Connecticut, examined the revised statements from hundreds of the largest U.S. companies between 1995 and 2004, then co-authored the paper, titled "The Effects of Organizational and Political Embeddedness on Financial Malfeasance in the Largest U.S. Corporations: Dependence, Incentives, and Opportunities."

The researchers' analysis examines restatements that occurred after Congress passed the 2001 Sarbanes-Oxley Act, which held chief financial officers (CFOs) and chief executive officers (CEOs) personally responsible for corporate violations of security and exchange laws. Soon after this legislation was passed, the number of financial restatements rapidly increased. After eliminating the legitimate reasons for financial restatements such as accounting rule changes, their analysis shows that over 21 percent of the corporations in their study group restated their finances at least once, and some as many as seven times, during the study period.

Their research centers on financial statements, corporate structure, and politics. And the findings have important implications for public policy, Prechel says. "The corporate and state structures enacted in the late 20th century were the outcome of a long-term, well-financed and systematic political strategy that provided managers with unprecedented power, autonomy, and opportunity to engage in financial malfeasance," the paper's summary states.

There are three main findings from their quantitative analysis. First, capital dependence on investors creates incentives to engage in financial malfeasance. Second, managerial strategies to increase shareholder value create incentives to engage in financial malfeasance. Third, the multilayer-subsidiary form and the political structure permitting corporate political action committees' (PAC) contributions create opportunities to engage in financial malfeasance.

A key point of the analysis, Prechel says, is that the multilayer-subsidiary business model, where parent companies own multiple legally independent subsidiary corporations, creates opportunities for managers to engage in financial malfeasance by overstating the value of the assets in these corporate entities. Prechel says that one case of improper reporting involved Enron, which overstated the value in one of its subsidiaries by $256 million.

He says he and Morris focus on the concept of "malfeasance" -- an act that violates a law or a rule (or violates their intent) established by a government agency or a nongovernmental organization responsible for corporate financial oversight -- rather than "crime," because behaviors that are legal may still mislead investors, especially small investors, due to information asymmetry (i.e., when one party (e.g., the company) has access to information that the other (e.g., investor) lacks).

Individual investors are vulnerable when they invest in corporations directly or via mutual funds, Prechel says. "There are opportunities for management to engage in financial malfeasance that investors aren't even aware of," he explains. "Management is aware of the true financial picture, while individual investors are not."

Companies that do not use the multilayer subsidiaries form file revisions less frequently, Prechel says.

"The more subsidiaries a parent company has, the higher the likelihood it will restate its finances," he says. "But, in the cases that were included in the analysis, there is no good reason for management to not understand their corporation's financial status."

He says Congress could fix the problem by reinstating the tax on capital transfers that it removed in 1986.


Story Source:

The above story is based on materials provided by American Sociological Association. Note: Materials may be edited for content and length.


Journal Reference:

  1. Harland Prechel and Theresa Morris. The Effects of Organizational and Political Embeddedness on Financial Malfeasance in the Largest U.S. Corporations: Dependence, Incentives, and Opportunities. American Sociological Review, 2010; 75 (3) [link]

Cite This Page:

American Sociological Association. "Sociological study reflects high financial malfeasance rates in largest US corporations." ScienceDaily. ScienceDaily, 2 June 2010. <www.sciencedaily.com/releases/2010/06/100602121107.htm>.
American Sociological Association. (2010, June 2). Sociological study reflects high financial malfeasance rates in largest US corporations. ScienceDaily. Retrieved July 29, 2014 from www.sciencedaily.com/releases/2010/06/100602121107.htm
American Sociological Association. "Sociological study reflects high financial malfeasance rates in largest US corporations." ScienceDaily. www.sciencedaily.com/releases/2010/06/100602121107.htm (accessed July 29, 2014).

Share This




More Science & Society News

Tuesday, July 29, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

$15B Deal on Vets' Health Care Reached

$15B Deal on Vets' Health Care Reached

AP (July 28, 2014) A bipartisan deal to improve veterans health care would authorize at least $15 billion in emergency spending to fix a veterans program scandalized by long patient wait times and falsified records. (July 28) Video provided by AP
Powered by NewsLook.com
The Carbon Trap: US Exports Global Warming

The Carbon Trap: US Exports Global Warming

AP (July 28, 2014) AP Investigation: As the Obama administration weans the country off dirty fuels, energy companies are ramping-up overseas coal exports at a heavy price. (July 28) Video provided by AP
Powered by NewsLook.com
Russia Saves Gecko Sex Satellite, Media Has Some Fun With It

Russia Saves Gecko Sex Satellite, Media Has Some Fun With It

Newsy (July 27, 2014) The satellite is back under ground control after a tense few days, but with a gecko sex experiment on board, the media just couldn't help themselves. Video provided by Newsy
Powered by NewsLook.com
Cellphone Unlocking Bill Clears U.S. House, Heads to Obama

Cellphone Unlocking Bill Clears U.S. House, Heads to Obama

Reuters - US Online Video (July 27, 2014) Congress gets rid of pesky law that made it illegal to "unlock" mobile phones without permission, giving consumers the option to use the same phone on a competitor's wireless network. Mana Rabiee reports. Video provided by Reuters
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:
from the past week

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins