Correlation between Violations of Environmental Legislation and Probable Distortion of Financial Reporting

ABSTRACT This work seeks to statistically verify the hypothesis that there is a link between violations of environmental legislation and distortions in the financial reporting of economic entities. For this purpose, the authors studied the reporting documents of companies that are operating in Russia and have violated environmental legislation. The financial reporting of the latter was analyzed based on the authors’ methodology. In order to determine the probability of distortion, companies were typologized and a probit model was constructed. The results confirmed the working hypothesis that economic entities’ opportunistic behavior in the area of environmental protection is, as a rule, accompanied by distortions of financial information about their activities.