This study aims to investigate whether variation in city-level crime is related to firms’ likelihood of accounting misconduct, using social disorganization theory to conceptualize the association between community disorder and organizational rule-breaking.
Using a sample of 33,663 US firm-year observations from 2002 to 2018, the study examines the association between crime rates in firms’ headquarter cities, measured using FBI Uniform Crime Reporting data and fraudulent reporting, measured by SEC accounting and auditing enforcement releases (AAERs). The authors use logistic regression, fixed effects models, instrumental variables and generalized propensity score balancing to assess whether the documented association is stable across alternative approaches.
Firms headquartered in cities with higher crime rates are associated with a higher incidence of AAER-based misconduct. The association is stronger for violent crime than property crime and is more pronounced when CEOs are both highly compensated and long-tenured. The association is also stronger in larger cities and weakened among high-tech firms.
This study introduces a novel perspective by examining the association between community-level social disorder and confirmed, regulator-sanctioned instances of accounting fraud. By focusing on AAERs – rather than discretionary but legal accounting measures used in prior research – it shifts attention to misconduct that meets formal enforcement thresholds. The findings provide potential insights for regulators (e.g. prioritizing oversight in high-crime areas), auditors (e.g. integrating crime statistics into fraud risk assessments) and policymakers (e.g. developing targeted governance initiatives in vulnerable communities). This approach refines the theoretical scope, strengthens inference and connects environmental context to concrete strategies for preventing corporate wrongdoing.
