Accrual management as an indication of money laundering through legally registered Mafia firms in Italy

Abstract

Purpose -This paper investigates how accounting is used to disguise and realize money laundering activities in specific socio-economic and political contexts and whether discretionary accruals can provide evidence of such illicit practices realized through legally registered Mafia firms (LMFs).Design/methodology/approach -The study is based on a sample of 224 Italian firms identified as LMFs, due to having been confiscated by judicial authorities because of their owners being accused of Mafia-type association. Using a multivariate regression model, specifically developed discretionary accrual proxies for LMFs are compared with those of a population of lawful firms (LWFs). Originality/value -This study adopts discretionary revenue and expense accrual proxies that provide additional insight into the simultaneous manipulation of revenues and expenses, linked to money laundering, which may not be fully detected by traditional aggregate accrual models.Furthermore, it suggests that the incentive for unlisted LMFs to manage accruals may be fostered by the irrelevance of their financial statements to trades with stakeholders. More importantly, this paper may aid regulators in identifying accounting signals that can be used in risk assessment models or in the detection of criminal practices.

Deshelling the Shell Companies Using Benford’s Law: An Emerging Market Study

“…Benford’s Law can be used to segregate natural numbers from concocted numbers. Financials can provide vital clues regarding the nature of the firm and unlawful practices (Ravenda et al, 2018). Benford’s Law is helpful in detecting the cases where fictional numbers are involved or at least can be used as a signal to audit more (Nigrini, 2018).…”

To launder or not to launder: are there positive effects for the economies of countries who launder money?

“…Harvey (2004) emphasises that when money laundering arises, major reputational risks and reputational costs offer sufficient incentive to comply. By analysing 224 Italian firms identified as legally registered Mafia firms, Ravenda et al (2018) show that these firms can usually rely on financial resources from illegal activities to reduce the need for bank financing and lessen the associated incentives to report positive financial performance or acceptable accrual quality. Furthermore, they find that in order to smooth income and conceal/conduct money laundering activities, legally registered Mafia firms manage aggregate, revenue and expense accruals more than lawful firms do in the pre-confiscation years (Ravenda et al, 2018).…”

“…By analysing 224 Italian firms identified as legally registered Mafia firms, Ravenda et al (2018) show that these firms can usually rely on financial resources from illegal activities to reduce the need for bank financing and lessen the associated incentives to report positive financial performance or acceptable accrual quality. Furthermore, they find that in order to smooth income and conceal/conduct money laundering activities, legally registered Mafia firms manage aggregate, revenue and expense accruals more than lawful firms do in the pre-confiscation years (Ravenda et al, 2018). On the contrary, the effective intervention of legal administrators contributes to no significant difference in the level of accrual management between legally registered Mafia firms and lawful firms in the post-confiscation years (Ravenda et al, 2018).…”

“…Furthermore, they find that in order to smooth income and conceal/conduct money laundering activities, legally registered Mafia firms manage aggregate, revenue and expense accruals more than lawful firms do in the pre-confiscation years (Ravenda et al, 2018). On the contrary, the effective intervention of legal administrators contributes to no significant difference in the level of accrual management between legally registered Mafia firms and lawful firms in the post-confiscation years (Ravenda et al, 2018). Gill and Taylor (2002) highlight that there is a scarcity of information on cost benefits in anti-money laundering work and identify that this is a research area requiring further studies.…”

“…(2020) conduct a systematic literature review on money laundering and its related areas to show that existing research is focused on anti‐money laundering framework and its effectiveness, the effect of money laundering on other fields and the economy, the role of actors and their relative importance, the magnitude of money laundering, opportunities for money laundering, and detection of money laundering. Moreover, the United Kingdom (Cowdock, 2017), the United States (Van Duyne, 2003; Levi and Reuter, 2009), Spain (Soriano, 2016), Malaysia (Aurasu and Rahman, 2018), Italy (Ravenda et al ., 2018) and Hong Kong (Ho, 2017) have been investigated by researchers, whereas Australia and Canada have received less attention. In particular, AUSTRAC has announced that ‘Money laundering is a critical risk to Australia’ and ‘has had its fair share of high‐profile money laundering cases in recent years’ (Buchanan, 2020).…”