The price of bad behavior: Study reveals overlooked factor in corporate integrity: How executives’ personal values influence their professional conduct

This article originally appeared in the Fall 2024 issue of Trulaske Magazine.

For years, we’ve watched business executives land themselves in jail for breaking the rules to get rich. Even Hollywood has made movies about these scandals.

Traditionally, finance and accounting experts have focused on measures used to prevent fraud such as checking on executives, examining financial records and having strong rules. However, little attention has been paid to how executives personally value honesty. A new study by Adam Yore, an associate professor of finance and the Stephen Furbacher Professor of Organizational Change at the Trulaske College of Business, shows that executives’ private life behavior and their professional actions are closely connected by examining managers with extramarital affairs, substance abuse problems, violent temperaments, or who are just allergic to telling the truth.

“We do find that personally duplicitous executives are more likely to cook the books and engage in malfeasance,” said Yore. “When these types of revelations become public, the financial markets respond and reflect how the lack of personal ethics are destructive to a firm’s value. On average, such behavior costs their investors over a hundred million dollars as their stock price drops.”

While the standards direct public accounting auditors to look at the overall tone set by top executives; they do not specifically require auditors to consider the personal behavior of these administrators and this could give them some leeway to avoid broaching such touchy subjects, Yore said.

So how do public auditors respond? Yore said that the auditors do perceive it as a risk to their portfolio of clients.

“When companies have problems, auditors can be at risk too,” Yore said. “Auditors might charge more if the audit is risky, especially if there’s a reputation for bad executive behavior. This is because there’s a higher chance that they might miss something important, like financial fraud, which could hurt the auditor’s own reputation.” They also find that some auditors simply drop the client.

However, Yore’s research found that auditors are primarily reactive and not proactive. They do not raise fees until after these negative events are made public. His study suggests that auditors manage their risk not just based on the company, but also considering the personal traits of the managers. However, not all executives are treated the same as auditors are more likely to forgive this behavior if it comes from a major client.

Yore’s paper, “Do auditors view off-the-clock misbehavior by company leadership as a signal of tone at the top?” was co-authored with Brandon Cline (Mississippi State University), Brant Christensen (BYU), and Nathan Lundstrom (University of Kansas) and published in The Accounting Review.