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Companies are less likely to engage in unethical accounting practices when their headquarters are in areas of high religious observance, new research by academics at the universities of Sussex and East London has revealed.
Using a sample of more than 23,000 US firm-year observations over a 15 year period, Dr. Emmanuel Mamatzakis and Dr. Eric Boahen found that managers working for companies based with strong religious observance were less likely to attempt classification shifting.
Practice - Revenue - Items - Core - Expenses
While the practice, which involves shifting revenue items and core expenses from or into special items in a bid to inflate a firm's core earnings, is not illegal, it is considered highly questionable on ethical grounds.
The study showed that being based in an area of strong religious feeling was as effective in maintaining ethical management behavior as strong corporate governance or the use of big four accountancy firms although not as effectively as the threat of legal action.
Dr - Emmanuel - Mamatzakis - Professor - Finance
Dr. Emmanuel Mamatzakis, Professor of Finance at the University of Sussex Business School, said: "Our study indicates that the strength of religious feeling locally at a business's HQ can help shape that company's ethical behavior and help deter the likelihood of managers' undertaking immoral accounting practices such as classification shifting.
"As authors we feel that regulators, auditors and investors should note how our findings show the influence of religion in subduing the risk of misreporting and strengthen monitoring mechanisms put in place by management to...
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