Do Mafia Ties Matter? Accountants with Mafia Connections, and the Quality of their Work as Monitors in the‘Clean’ Economy

Abstract

We exploit a proprietary government database to identify Italian firms with alleged ties to the Mafia through their executives, directors, or shareholders. We assume that the accountants who work as auditors for these organizations are also corrupt, and term these individuals “suspect accountants”. We investigate the quality of the work by these suspect accountants in their role as auditors for “clean” firms with no known ties to the Mafia. We predict and find evidence that suspect accountants allow their clients (treatment firms) greater discretion to engage in earnings management behavior that lowers taxable income, compared to a control sample of “clean” firms and auditors with no known ties to the Mafia. The evidence is consistent with suspect accountants being low-quality monitors in the “clean” economy. Regulators and enforcement agencies should include accountants with ties to the Mafia in their policing and surveillance activities, and stronger incentives are needed to dissuade individuals with Mafia ties from providing such services.

Keywords: corrupt accountants; connections to organized crime; criminal investigations; financial reporting quality; earnings management; tax avoidance; accountant criminality

JEL Classification: G31,G32,G38, K42, K49