Corporate Culture and Financial Reporting Risk: Looking Through the Glassdoor

• In Event: Fraud and Financial Reports

Abstract

We study whether financial reporting risk is associated with job satisfaction, company culture, and opinions of senior leadership. We use novel data on employees’ perspectives obtained from the website Glassdoor, covering 14,282 firm-years in the period 2008-2015. We find that firms with lower levels of “culture and values” (as measured by employees) and lower levels of job satisfaction are more likely to be subjected to SEC fraud enforcement actions and securities class action lawsuits. The same measures of corporate climate are also associated with an increased likelihood that a company will narrowly meet or beat market earnings estimates. Conversely, we find job satisfaction and positive employee opinions of senior leadership to be associated with lower abnormal accruals. We also find that the association between firms’ culture and financial reporting risk is stronger for firms with weaker board independence. Thus the work environment, as perceived by employees, appears to play a critical role in financial-reporting risk.

Authors

• Yuan Ji, Hong Kong Polytechnic University

• Oded Rozenbaum, George Washington University

• Kyle Welch, George Washington University