Diverse communities keep corporate accounting in check

Companies which have their headquarters in more diverse communities are far less likely to manipulate their financial results, according to new research.

Corporate accounting scandals have long undermined public trust, with high-profile cases showing how manipulated earnings can mislead investors and harm entire markets.

However, new research involving the University of Essex suggests that the social environment around a company - especially the diversity of its local community - may play a vital role in keeping such practices in check.

According to new research published in the Journal of Accounting, Auditing & Finance, companies located in more diverse communities are significantly less likely to manipulate their earnings.

The research team explored how the diversity of local communities - measured across race, religion, age, and gender - shapes corporate accounting behaviour.

The study was led by Professor Gaia Melloni from HEC Lausanne, University of Lausanne, working with Dr Ricardo Malagueño de Santana from Essex Business School, Ana Marques from Norwich Business School, and Jafar Al Saleem from SUNY Empire State University.

After examining nearly 13,000 activities by companies in the United States from 2000 to 2016 the researchers found that firms located in more diverse communities were consistently less likely to manipulate their results. This was true across different ways of measuring financial misreporting and after accounting for other business factors.

The research also revealed that firms led by female CEOs or those with higher-paid executives were less likely to engage in accounting tricks.

At a time when political debates in many countries are questioning the value of diversity, this study offers a reminder that inclusiveness is not a weakness, but rather a strength.

Dr Malagueño de Santana, explained: “Rather than eroding collective strength, diversity provides an additional line of defense against corporate misconduct, benefiting not only investors but also employees, consumers and society as a whole.”

“Companies don’t operate in a vacuum - they’re part of local communities,” added Professor Gaia Melloni. “These communities, made up of people from different backgrounds, can influence how businesses behave. When communities are more diverse, companies face a wider range of perspectives and public expectations. This broader scrutiny can discourage shady accounting practices.”

The researchers said their findings show that the communities where firms operate can serve as “strong safeguards of financial honesty”.