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Climate for Scandal: Corporate Environments that Contribute to Accounting Fraud


  • We thank Arnold Cowan, two anonymous referees, and participants at the Eastern Finance Association Meeting and Academy of Financial Services Meeting for their helpful comments.

* Corresponding author: Department of Finance, 303 Lowder Business Building, Auburn University, Auburn, AL 36849-5245; Phone: (334) 844-3002; Fax (334) 844-4960; E-mail:


We examine the governance characteristics, earnings quality, growth rates, dividend policy, and compensation structure of 97 firms recently under investigation by the Securities and Exchange Commission (SEC) for accounting fraud. Our results show that the corporate environment most likely to lead to an accounting scandal manifests significant growth and accounting practices that are already pushing the envelope of earnings smoothing. Firms operating in this environment seem more likely to tip over the edge into fraud if there are fewer outsiders on the audit committee and outside directors appear overcommitted.