The effect of economic complexities and green economy on financial statements fraud
| Date | 05 September 2023 |
| Pages | 267-286 |
| DOI | https://doi.org/10.1108/JFC-02-2023-0036 |
| Published date | 05 September 2023 |
| Author | Zainab Ahmadi,Mahdi Salehi,Mahmoud Rahmani |
The effect of economic
complexities and green economy
on financial statements fraud
Zainab Ahmadi
Department of Accounting, Islamic Azad University Sanandaj Branch, Sanandaj, Iran
Mahdi Salehi
Department of Economics and Administrative Sciences,
Ferdowsi University of Mashhad, Mashhad, Iran, and
Mahmoud Rahmani
Department of Accounting, Islamic Azad University Sanandaj Branch, Sanandaj, Iran
Abstract
Purpose –This study aims to address therelationship between economic complexities (EC) and thegreen
economy (GE) with fraud inthe listed companies on the Tehran stock exchange. The authorsstudy whether
EC and GE increase the detectionof financial statement fraud.
Design/methodology/approach –The authors used a multiple regression model based on the panel
data method and fixed effect model to test hypotheses. The sample includes 1,351 companies listed on the
Iranian stockexchange from 2014 to 2021.
Findings –The results show a negative and significant relationship between EC and GE with financial
statementfraud.
Originality/value –Since this research is the first to address the mentionedtopic in emerging markets, it
provides helpful insights for financial statement users, analysts and legal entities. The study fills the
literaturegap and promotes knowledge regarding its relevant literature.
Keywords Economic complexity, Green economy, Financial statements fraud
Paper type Research paper
1. Introduction
Agency theory assures owners that managers always act in owners’interest (Zhao et al.,
2021). Yet, following the managers’incentives to increase their interests by committing
fraud in financial statements (Zhao et al., 2021;Xin et al.,2018), the theory is not always
viable (Mousavi et al.,2022). Fraud refers to a deceptive act performed mainly for personal
interest or posing loss for anotherparty (Directive, 2017). The Association of Certified Fraud
Examiners (ACFE, 2020) classifies fraud into three main categories known as fraud tree,
including asset misappropriation, corruption and financial statement fraud. Asset
misappropriation is the most prevalent fraud type with the lowest loss, corruption is the
next type and financial statements fraud is the less common type with the highest loss
(ACFE, 2020). Each type of fraud has distinct features and various factors, including
company features and economic factors, affect them. Therefore, finding the fraud reasons
can prevent financial lossesand provide the well-being of the interested parties.
EC measures are applicable for forecasting economic growth rate, the inequality of
income and emissions of greenhouse gas. Hidalgo (2021) argue that more critical issues,
Economic
complexities
and green
economy
267
Journalof Financial Crime
Vol.31 No. 2, 2024
pp. 267-286
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-02-2023-0036
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
including the reconsideration of industrial policy, the widespread use of artificial
intelligence and the propositionof endogenous growth theory, primarily drivethe reviews of
EC. In this sense, some real experiences might be named, such as China’s special economic
zones, the Superclusters Initiative of Canada and the Smart Diversification strategy of
Mexico. Therefore, the EC is a means applied by economists and practitioners at the
microlevel economyto improve productionand economic activities.
To be more precise, economists are remarkablyconcerned about the factors intensifying
climate change and environmental detriments. Most countries have transmitted their
traditional economic plan featured by ineffective carbon dioxide emissions to a green plan
characterized by optimizedcarbon dioxide emission to alleviate economic growth’snegative
consequences on the environment (Wang and Lee, 2022;Lee et al., 2021). In special, one of
the essential prerequisites of green growth plans is applying and using techniques and
goods with environmentally friendly production and application (Ahmad et al., 2021).
Therefore, applying green productive ability is counted as an invented mechanism for
advancing environmental conditions in current years (Fraccascia et al.,2018). Under this
approach, Mealy and Teytelboym (2022) developed a novel integrated green complexity
index (GCI) to evaluate a country’scapability to use the green productive structure.
The paper is organized as follows. First, the theoretical foundation and hypothesis
development are presented. Then, research methodology and data analysis are provided.
Finally, the discussionand results are presented.
2. Theoretical foundation and hypothesis development
Various factors affect fraud in companies and their management (Zhao et al.,2021). For
instance, in inefficient corporate governance, independent managers decrease the possibility
and intensityof fraud; the shareholders withthe highest shares constrainother shareholders’
illegal behavior (Chen et al.,2005). Companies’economic and political situations drive
managers’financial misbehaviors (Jensen and Meckling,1976). Regarding the EC, two basic
measures are proposed: relatedness andcomplexity. Relatedness measuresmainly deal with
the specification of locations and operations, besides leveraging data about mutual
communications,for example, integrated data about operations in other locations. EC metric
deals with theexistence of multiple elementssimultaneously, not by applyingaccumulations
(simplicity) or distributions (disorganized sophistication). In contrast, it uses dimensionality
depletion methods, partially conserving the specification of the factors engaged and
monitoringtheir mutual communication(Hartmann et al.,2017).
Complexity measures were basically obtained through international trade information
and proved by their capability to forecast future economic growth rates (Hidalgo and
Hausmann, 2009; Hausmann, 2014).As well as the application of EC in nonexport settings,
including patents by information technology in the USA (Balland and Rigby, 2017) and
employment regarding geographyand industry in Mexico (Ch
avez et al.,2017)and the USA
(Fritz and Manduca, 2019;Wohl etal.,2020). The EC literature has investigated how various
types of relatedness, comprising industrial and occupational specification and knowledge,
are willing to affect the product diversification, development and survival of companies or
how policies and institutional settings determine the level of relatedness in diversification
(Jara-Figueroa et al.,2018). Therefore, we expect EC to manifest in diversification and
information technologyadvancement in the firm’s economy.
It is discussed that diversificationmight be increased through contacting a businessunit
with other industries (Berry, 1975). Denoting the potentialities for agency problems caused
by product diversification. For instance, Lang and Stulz (1994) indicate that companies
expanding their business diversification have experienced poorer performance and lower
JFC
31,2
268
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