Does Being More Sustainable Make Firms Less Manipulative? Understanding the Role of Corporate Sustainability and the COVID-19 Crisis in Financial Manipulation

Abstract

The tendency of firms to distort financial statements has increased. Cases like the Enron Scandal and the 2008 financial crisis as well as their results have made understanding the propensity firms have to manipulate their financial statements important. Moreover, sustainable companies have been suggested as complying better with ethical rules. This study questions whether any difference exists between sustainable and less sustainable firms in terms of the likelihood of financial manipulation. The study also examines how the COVID-19 crisis was reflected in financial manipulation. This study measures the likelihood of financial manipulation being committed using Beneish’s M-score. This research uses the Mann-Whitney U and One-Way ANOVA tests to examine whether or not any difference exists between the pre- and post-COVID-19 periods and between sustainable and less sustainable companies in terms of financial manipulation. The results illustrate sustainable firms to have less of a tendency to commit financial manipulation compared to less sustainable companies, with this likelihood increasing for both groups in times of crisis. The results suggest being sustainable to reduce the likelihood of financial manipulation by supporting the formation of an ethical environment in firms and financial manipulation to be considered as a crisis response for both types of firms during a crisis.