Accounting Information as Political Currency

Can accounting influence politics? It may have in the 2004 Congressional races, according to a new study from MIT and Harvard.

Corporations who donated at least $10,000 to closely watched U.S. Congressional races in 2004 were more likely to understate their earnings in the second and third quarters of that year, says a study from Harvard Business School's Karthik Ramanna and MIT colleague Sugata Roychowdhury.

Ramanna, who studies issues seen at the intersection of accounting, economics, and politics, says “downward earnings management” can be a type of in-kind political contribution. Companies do it to avoid regulatory scrutiny or to influence voters – think oil company profits at a time of rising consumer fuel prices.

“Such downward earnings management…seems to have been motivated by the desire of contributing firms to not taint preferred candidates with association to the political red flag of 2004—outsourcing—as well as to ensure future benefits and avoid future costs in regulatory matters,” Ramanna explains.

Feeling intellectual about accounting today? Explore the topic further in a Harvard Business School Working Knowledge feature about Ramanna and Roychowdhury’s work.