Corporate social responsibility and corporate fraud

This study aims to examine the impact of corporate culture, measured by corporate social responsibility (CSR), on the likelihood and severity of corporate fraud. CSR literature indicates that corporate managers are moral actors and are obliged to exercise their discretionary decisions according to their moral standards. Based on the moral development theory, this study argues that higher managers’ ethical values reflected by higher CSR activities are less likely to commit fraud and have lower severity of fraud.

This study argues that at the firm level, corporate culture can be measured by firms’ CSR activities. Using probit, match-pair, propensity matching and Heckman regressions on a sample of 152 criminal corporate fraud cases in the USA from the US Department of Justice (DOJ) during 2000 and 2010, this study empirically examines the impact of CSR, CSR strengths and concerns scores on the likelihood and the severity of corporate fraud.

Firms with higher CSR and CSR strengths (concerns) scores have lower (higher) likelihood and lower (higher) severity of corporate fraud. This study finds that firms with higher community, employee, environment and product-related CSR have lower likelihood of fraud, and firms with higher diversity, employee, environment and product-related CSR have lower fraud severity.

Establishing a positive corporate ethical culture is essential to curb the outbreak of corporate fraud that threatens our societal norms. The findings also shed some light for investors, corporate board of directors and regulators to consider CSR as a reflection of top managers’ moral values that is negatively related to the occurrence and severity of corporate fraud.

Strengthening moral values among top executives and employees in corporations by encouraging CSR activities aid our society to alleviate future outbreak of epidemic problem for corporate fraud.

This study brings a new perspective that there is a relationship between corporate ethical culture within an organization, measured by CSR activities, and corporate fraud based on the cognitive moral development theory in organization.