Does your accounting firm have connections with the mafia?

Business owners worldwide need good accountants. Corporations large and small need good accountants. But how do you find a good accountant? My (not so serious) suggestion is to go and ask your accountants if they have connections to organised crime. The answer they give you might tell you whether to stay or switch accountants, but you shouldn’t think that you should stay away from accountants with mafia connections. Quite the opposite.

With apologies to my Italian readers, I must write about a study of Italian accounting firms and their connections to the mafia. This is not to promote stereotypes but simply a result of Italy having the best data about organised crime and its impact on the economy. Petro Bianchi and his colleagues have used this data to check what accounting firms have connections with the mafia and the kind of work they do.

Think about it for a bit and put yourself in the shoes of Michael Corleone. You just succeeded your father Don Vito Corleone as the head of the Corleone family after Don Vito’s semi-retirement. Your father’s trusted consigliere and adopted son Tom Hagan is the family’s lawyer and accountant. You don’t trust Hagan for the upcoming challenges, because as the documentary movie “The Godfather” shows, you think he is not a “wartime consigliere” and not the right man to manage the family’s business in the upcoming gang war. But you keep Hagan around to manage the family’s legitimate businesses.

But now, who do you choose for a new accountant? Well, because your family business is not entirely legitimate, you want to have the best accountant possible. Accountants who audit your financial statements so effectively that the final product is so flawless it will never be questioned by the tax authorities. And guess what, you are not alone in that need. All the other crime families have the same need.

In comes Petro Bianchi with his research on Italian accounting firms. Thanks to the databases on organised crime in Italy, he can identify accounting firms that likely have connections to the mafia. Clearly, we do not know what work these accounting firms do for the mafia, but we can observe the work they do for other clients that are legitimate businesses.

And it turns out that companies that are audited by accounting firms with mafia connections have financial statements of much higher quality. These firms have lower levels of abnormal working capital accruals, lower levels of small earnings, fewer extraordinary (below the line) items, and fewer tax restatements of their accounts. Even more, accounting firms with connections to the mafia give the legitimate businesses a harder time, issuing more qualified opinions and asking for more work to be done before they accept financial statements. In essence, these accounting firms make sure that neither their clients nor the accountants raise any suspicion for low quality or dodgy work with the tax authorities. Because it is in their interest not to raise any suspicions.

So, the next time you look for a good accounting firm, you might want to ask the mafia for recommendations. They know which accounting firms are really good.