White-collar money laundering through opportunistic earnings management: fair value accounting practices of failed finance companies in Sri Lanka

Abstract

Purpose The purpose of this paper is to discuss how the failed finance companies in Sri Lanka used fair value accounting practices as an opportunistic earnings management practice to launder money under weak corporate governance structures. Design/methodology/approach This paper uses a qualitative design under the philosophy of interpretivism. The case study research strategy is used inductively to investigate how fair value accounting had been used for money laundering. Findings The dishonest intention of major shareholders and board of directors had forced failed companies to misuse fair value accounting to manipulate performance and use them for personal benefits which were detrimental to the depositors and stability of the companies. The weak corporate governance structures which were developed because of regulatory forbearance were influential for manipulations. The concentrated ownership had reduced agency conflicts between shareholders and managers because major shareholders were the members of the board of directors. The appointed committees were not effective because of an inadequate number of independent directors with sufficient expertise. The reduced agency conflict between shareholders and managers has exaggerated the agency conflict with depositors. Therefore, it is recommended to dilute ownership concentration to establish good corporate governance structures and make stable institutions. Research limitations/implications This study does not discuss the dishonest fair value accounting practices of all licensed finance companies because of the sensitivity of the matter for surviving companies. Originality/value This paper is an original work of the authors which discusses how fair value accounting practices had been used to launder money in failed finance companies in Sri Lanka as an emerging market context.