We might imagine that prestigious and high growth firms with excellent brands will be more inclined to toe the line, ethically speaking, for fear that their brands may be tarnished by any scandals.  It’s not a conclusion shared by new research from Washington State University, which finds that bigger firms are actually more likely to behave unethically.

The researchers assessed the corporate profiles of 250 firms that were involved in financial securities fraud between 2005 and 2013.  These companies were then compared with a control sample who had no such issues with the Securities and Exchange Commission.  A number of clear trends emerged from the analysis.

“Prestigious companies, those that are household names, were actually more prone to engage in financial fraud, which was very surprising,” the researchers explain. “We thought it would be companies that were struggling financially, that were nearing bankruptcy, but it was quite the opposite. It was the companies that thought they should be doing better than they were, the ones with strong growth imperatives–those were the firms that were most likely to cheat.”

Cooking the books

Financial securities fraud involves deliberate attempts to manipulate the financial markets, often by providing false information or otherwise misrepresenting the financial status of the firm.

“What these companies were doing was essentially fudging the numbers, lying to investors, other companies and the SEC,” the researchers say. “Eventually, you have to make up for the money that was lost, that really never existed, so shareholders lose money, people lose retirement plans, people lose jobs. It’s very, very damaging.”

The analysis showed that Fortune 500 companies were four times as likely to commit fraud than their peers in the control group.  There was similar over-representation among firms that traded on the NYSE.

Such fraud was also more common in firms where the CEO and chair of the board were the same person, which the researchers believe may be a key characteristic to explore in more detail.

“We need to look more at corporate leadership arrangements, and the responsibility of individuals in creating the culture of the company itself,” they conclude. “How can leaders encourage companies to be more successful not only in terms of profit or growth but also in terms of corporate social responsibility?”