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 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 just published in the Journal of Accounting, Auditing & Finance, companies located in more diverse communities are significantly less likely to manipulate their earnings.
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In their article “Community Diversity and Earnings Management: Empirical Evidence,” Gaia Melloni (HEC Lausanne, University of Lausanne), Ana Marques (Norwich Business School), Ricardo Malagueño (Essex Business School), and Jafar Al Saleem (SUNY Empire State University) explore how the diversity of local communities—measured across race, religion, age, and gender—shapes corporate accounting behavior.
The study aims to answer a straightforward question: Are companies based in more diverse areas less likely to manipulate their financial results? The underlying idea is simple yet powerful: when communities bring together people from diverse backgrounds (race, religion, age, and gender), firms are exposed to a broader mix of perspectives and expectations. Could this broader and heterogeneous scrutiny act as a natural deterrent to questionable accounting practices?
To test their hypothesis, the researchers examined nearly 13,000 U.S. firm-year observations spanning the period from 2000 to 2016. Using data from the U.S. Census and the Association of Religion Data Archives, they constructed measures of racial, religious, age, and gender diversity and compared these with indicators of earnings management, including discretionary accruals, revenues, and current accruals. Their models also controlled for a battery of firm-level characteristics, including size, profitability, and leverage, among others. Advanced econometric techniques were applied to ensure the robustness of the findings, confirming a clear and consistent link: greater community diversity is associated with less earnings manipulation.
The study confirmed that firms located in more diverse communities were consistently less likely to engage in earnings management. This was true across different ways of measuring financial misreporting and after accounting for other business factors. All four types of diversity—race, religion, age, and gender—were negatively associated with earnings management or manipulation. In addition, the research revealed that firms led by female CEOs or those with higher-paid executives were less likely to engage in accounting tricks.
“Companies don’t operate in a vacuum; they’re part of local communities,” Professor Gaia Melloni of HEC Lausanne explains. “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.”
“Our findings expand the conversation on diversity beyond boardrooms and workplaces. They show that the communities where firms operate can serve as strong safeguards of financial honesty.”
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. Across the world, some national movements portray diversity as a threat to cohesion or stability, suggesting that societies and businesses would be safer if they were more homogenous. Professor Ricardo Malagueño of Essex Business School adds, “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”.
The study suggests that fostering inclusive and diverse communities can also promote greater integrity and accountability in business. Professor Jafar Al Saleen of SUNY Empire State University comments, “People from different backgrounds, whether defined by religion, race, age, or gender, tend to see things differently and ask different questions. A heterogeneous community brings together a variety of moral standards, social expectations, and lived experiences. This creates a broader, more complex form of scrutiny that companies cannot easily ignore.” Finally, Professor Ana Marquez of Norwich Business School concludes that “To maintain legitimacy and trust, businesses must adapt to these diverse demands, aligning their practices with higher levels of transparency and fairness.”
Details of the study can be found at: https://journals.sagepub.com/doi/10.1177/0148558X251377144
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