Are natural disasters and accounting fraud related? Evidence from the US

Purpose
The authors examine the relationship between natural disasters and accounting fraud in the US setting.

Design/methodology/approach
The authors adopt an archival approach by collecting data for 33,705 US firm-year observations (4,289 unique firms) over the 1996–2018 period. Probit regression analysis is then used to evaluate the relationship between natural disasters and accounting fraud. Several endogeneity tests are also performed to improve the robustness of the empirical results.

Findings
The authors find a positive relationship between natural disasters and accounting fraud. A mechanism test of the information environment is also performed, and the findings show that it explains the positive relationship between natural disasters and accounting fraud in our baseline results. Cross-sectional analyses are conducted. The authors find that the regional effects of low social capital, low religiosity and the presence of business combination laws magnify the positive relationship between natural disasters and accounting fraud. Moreover, the institutional monitoring effects of low institutional ownership, highly transient investors and less dedicated investors also magnify the relationship. Finally, low geographic dispersion, high market competition and low managerial ability also magnify the relationship.

Research limitations/implications
This study has major implications for various capital market participants. By understanding the positive relationship between natural disasters and accounting fraud, auditors should be better equipped to identify and deal with accounting fraud perpetrated by managers in firms. Restricting accounting fraud activity in firms should also enhance the quality of information provided to financial statement users, such as investors, leading to more efficient capital markets. Finally, by being better informed about the positive relationship between natural disasters and accounting fraud, policymakers and regulators can develop appropriate policies and regulations to restrict such fraud in firms.

Originality/value
The authors provide new empirical evidence that increases understanding of the consequences of natural disasters on accounting fraud.