The Role of Corporate Dishonesty as an Indicator of Recession
Recession is a word used to refer to a condition where economic activity slows down. Two successive quarters of negative GDP growth rate indicate a recession.
Recessions are supposed to be an integral part of the business and economic cycle of growth and decrease. An economy starts to grow at its manager (weakest point) and starts to decline after going to its peak (highest point).
There are many indicators of recession as a gross domestic product, real income, Manufacturing, Wholesale/Retail, Employment, etc. we are examining another factor of recession here corporate dishonesty.
What is corporate dishonesty?
Corporate dishonesty or fraud involves illegal or immoral and misleading acts done either by an individual as an employee of a company or the company itself. Corporate dishonesty is very complex and hence very hard to pinpoint.
When corporate fraud is committed by a top-notch company, the fraud can go up to millions and billions of money. And the suffers of these frauds are consumers, beneficiaries, lenders, other businesses, and finally the very company responsible and the employees of that company. And after the company is charged with fraud it is ruined and declared as bankrupt.
What are the reasons for Corporate Fraud?
1. To attract or retain investors
Greed can be sighted as one of the main reasons for corporate fraud as in any other fraud case. But in today’s world of high competition in global business, it may be the result of other factors too. A number of corporate fraud involves fraudulent accounting schemes to make a company’s profit look more profitable than it is in reality. The motive behind such acts is to captivate or hold back the lenders.
2. If the product of the company is defective or problematic
Another cause of corporate dishonesty can be a defective or problematic product that the company tries to conceal. Much of recent corporate dishonesty has been reported on behalf of pharmaceutical companies trying to conceal some of the side effects or hazards related to using some of the medicine manufactured and sold by them.
Many government authorities try to apply rules and regulations to find out, stop and punish such corporate frauds. But frauds go undiscovered for long years before they come to the notice of the concerned authorities, especially in the case of private companies.
One of the recession indicators: is corporate dishonesty
According to a study, companies lie ahead of the recession. Companies give more misleading information when the recession is about to fall on its head.
According to research at the University of Missouri and Indiana university, the more corporates lie about their financial condition, the higher the chances that the economy is headed for a recession in the coming five to eight quarters.
The new step will aid economists to predict with more accuracy the stance of the economy and whether an economic setback is ahead. But the predictions change as to whether we will get one and how bad it will be.
The new model indicates that misleading information is rising then also recession is not likely rather we are heading toward a time of slowed economic growth that is not deficient enough to be termed a recession.
According to a professor of accounting at the University of Missouri, Matthew Glendening, a participating member in the research when companies give misinformation, it takes many years for them to get caught, if they are caught at all but many are not caught only. He said that their model indicates that the chances of financial report manipulation aids in predicting the outlook of the economy.
The study depends on a yardstick called an M-score. This is an analysis tool used for deciding the chances of a financial report being manipulated. Information on sales, expenses, and corporate debt and the ratio between them are included in the M-score model to indicate the presumption that things have been manipulated. The researchers examined a database of corporate reports from companies trading publicly for the last 43 years.
The research indicated that the higher the combined score of companies trading publicly, the greater the chances of a recession happening in the next five to eight quarters. Smaller scores indicated a minor economic slowdown. According to the researchers’ corporate data manipulation was not only a predictor of recession but also damaged the economy.
According to Glendening calculations matter a lot and manipulated calculations can impact the economy in a negative way. He said that when financial reporting is not monitored properly and corporates manipulate financial reporting, it can lead to possible harm to the economy. This information is not only used by investors but other firms as well. In many instances, companies make investment and employment decisions according to this information which can be too hopeful.
