Accounting and corruption: a cross‐country analysis
| Published date | 12 October 2010 |
| DOI | https://doi.org/10.1108/13685201011083885 |
| Pages | 372-393 |
| Date | 12 October 2010 |
| Author | Ricardo Malagueño,Chad Albrecht,Christopher Ainge,Nate Stephens |
| Subject Matter | Accounting & finance |
Accounting and corruption:
a cross-country analysis
Ricardo Malaguen
˜o
ESADE Business School, Universitat Ramon Llull, Barcelona, Spain, and
Chad Albrecht, Christopher Ainge and Nate Stephens
Huntsman School of Business, Utah State University, Logan, Utah, USA
Abstract
Purpose – The purpose of this paper is to better understand the relationship between accounting and
auditing quality and the perceived level of corruption.
Design/methodology/approach – This relationship is studied by performing a cross-country
analysis using public data to measure accounting quality, audit quality, and corruption.
Findings – Consistent with the authors’ predictions, the paper finds evidence that accounting and
auditing quality are significantly related to the level of perceived corruption in a country.
Research limitations/implications – These findings suggest that countries with more
transparent reporting have lower levels of perceived corruption and that the level of perceived
corruption may be reduced in a country by improving accounting and auditing quality.
Practical implications – The findings suggest that countries can reduce the level of perceived
corruption by improving the transparency of financial reporting by improving accounting and
auditing standards.
Originality/value – While significant amounts of research has examined perceived corruption, this
study is the first to address the impact of high-quality accounting information on the level of perceived
corruption.
Keywords Corporate governance, Accountingsystems, Auditing, Corruption
Paper type Research paper
1. Introduction
Organizations are portrayed financially through audited accounting information.
The purpose of this information is to stakeholders about the financial status of the
organization, allowing them to make informed decisions regarding the organization.
Poor auditing and accounting[1] standards create a situation where there is a lack of
accountability to stakeholders, where managers can act in a way that is contrary to the
expectations of stakeholders without consequence, and where assets can be misused and
misallocated (Jensen and Mec kling, 1976).
Auditing and accounting standards seek to make financial information transparent,
mitigating the risk that those with economic power act in ways that are unethical,
illegal, or inappropriate. In short, one goal of accounting and auditing standards are to
make it more difficult for managers of organizations to act contrary to the expectations
of shareholders. When good accounting standards exist, organizations are required
to disclose information in ways that create transparent, accurate, and comparable
financial information. As organizations are held to higher accounting and auditing
The current issue and full text archive of this journal is available at
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The authors would like to thank the Government of Catalonia for financially supporting this
research.
JMLC
13,4
372
Journal of Money Laundering Control
Vol. 13 No. 4, 2010
pp. 372-393
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/13685201011083885
standards, management and others within the organization are forced to be more
transparent about the use of the organization’s assets, making corrupt practices by
management and others more difficult to commit and conceal. Indeed, as Hall and Yago
(2000, p. 2) indicate, “A key reason for keeping transactions secret is to conceal corrupt
practices. With transparency comes prying eyes.”
Corruption has been defined as:
[...] an exchange between two parties [...] which (i) has an influence on the allocation of
resources either immediately or in the future; and (ii) involves the use or abuse of public or
collective responsibility for private ends (Macrae, 1982, p. 678).
This definition is broad enough to include both political corruption, where one of the
parties is a public official and uses his or her office for private gain, as well as economic
corruption, where one of the parties uses economic power derived from his or her firm for
private gain. By definition, corruption requires illegal practices and often has to do with
illegal cash payments, misallocation of assets, and other inappropriate economically
driven transactions (Husted, 1999; Treisman, 2000). Accounting seeks to make the
economic transactions of an organization transparent. The role of auditing is to provide
third-party assurance of that transparency. In other words, accounting information is a
vehicle through which private companies demonstrate that they operate legally (i.e. that
they do not participate in rent-seeking behavior), and public institutions and their
managers are held accountable to the public.
In this paper, we perform a cross-country analysis using data from different
countries to empirically investigate the relationship between accounting and corruption.
We do not attempt to build a model that explains corruption – such models are plentiful
in the literature and, given the complexity of corruption, vary widely (for a review –
Andvig and Fjeldstad, 2001; Aidt, 2003). Rather, we investigate and provide evidence on
the relationship between corruption and the quality of accounting and auditing present
in a country. Specifically, we investigate the relationship between two measures of
accounting quality and corruption and find that for these measures a relationship exists.
We then construct a model for corruption using measures of accounting and auditing
and a proxy for economic development, and find that two measures of accounting are
significant in explaining corruption when controlling for economic development. To
further test the relationship between corruption and accounting, we replicate two
corruption models existent in the literature (DiRienzo et al., 2007; Treisman, 2000), and
find that adding proxies for accounting quality provide additional power in explaining
corruption. This is an important discovery because if, as our research suggests, better
accounting and auditing systems are associated with less perceived corruption, then
governments may be able to decrease corruption by improving accounting and auditing
standards – thus improving their business climate, encouraging investments by both
nationals and foreigners, and increasing their overall productivity and GDP.
2. Literature review
Corruption has been described as a serious global problem that affects countries
throughout the world (Transparency International, 2007). Furthermore, corruption
reduces foreign direct investment and economic growth (Mauro, 1995; Wei, 2000;
Gupta et al., 2002), lowers investment in education and health (Mauro, 1997), and
puts less corrupt countries at a disadvantage when seeking international contracts
Accounting and
corruption
373
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