What is it about?
The paper asks how practices that are now illegal spread between organizations before they become explicitly outlawed. To answer this I trace the diffusion of a specific type of financial fraud – stock option backdating, and look at two potential channels that can spread the practice: proximity to firms that have already backdated, and ties to a local office of an audit firm whose clients have backdated. The findings point to two interesting results. The first is that while backdating spreads from one firm to another, having a lenient auditor explains much of the diffusion of the practice than being close to other, backdating firms. What is interesting here is that the reason this was not observed in prior research is that the diffusion happens at the level of the local office of the external auditor (meaning it spreads within cities), rather than at the national level (or between cities). The second is that, depending on the legal environment, local offices of auditors either spread the practice or curtail it.
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Why is it important?
The cost of engaging in illegal practices is high, both for the adopting organizations and their auditors. In this paper, I trace how such practices spread, what conditions change the pattern of their diffusion and who are the actors that spread or curtail these practices.
Read the Original
This page is a summary of: How Misconduct Spreads: Auditors’ Role in the Diffusion of Stock-option Backdating, Administrative Science Quarterly, March 2018, SAGE Publications, DOI: 10.1177/0001839218763595.
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