The incentive for companies to collude on prices with their competitors lies in the increased profits that each may reap. Hiding the subsequent windfall to evade detection can, however, be problematic.

A working paper recently published by the National Bureau of Economic Research, the non-profit research organisation that promotes understanding of how the economy works, identifies how executives of companies active in cartels do exactly this.

David Yermack, a professor of finance and business transformation at New York University’s Stern School of Business, and co-authors, Tanja Artiga González and Markus Schmid of the University of St Gallen in Switzerland, examine more than 200 US companies accused by governments of price-fixing between 1986 and 2010.

Their research finds that companies alleged to have taken part in cartel activity engaged in “a range of practices designed to obscure their behaviour from both internal and external audiences”.

Compared to peer companies that did not face similar accusations, the authors write that cartel members are shown to engage in “unusually high levels of earnings smoothing,” - the levelling out of fluctuations in profit. Other accounting strategies that they identify include a 50 per cent higher incidence of financial restatements, as well as frequent reclassifications of industrial sectors, to “obscure year-to-year swings in profitability.” Additionally, cartel companies changed external auditors with less regularity, they find.

Prof Yermack and colleagues take the example of Bristol-Myers Squibb, the pharmaceutical company, as one prominent exponent of such accounting practices. Prior to its settlement of anti-trust allegations in 2007, they identify a period, 1998 to 2005, when the company “reclassified its line-of-business segments nearly every year” and when“five years of earnings results were restated, including two years that were restated twice.” Moreover, Bristol-Myers retained the same auditor for this period “despite the outward signs of financial reporting problems,” the professors assert.

In terms of corporate governance, the research also concludes that cartel firms “appear to avoid new outside monitoring by not replacing board members who resign.” Companies in question are found to favour the appointment of directors who are based abroad or hold multiple appointments, the authors write.

An additional finding is that top managers of companies accused of cartel participation “exercise [their] stock options more frequently than executives in the control sample.” Given that decisions to collude in cartel behaviour are usually made by senior management, the professors say that this arguably represents attempts by executives to withdraw their equity before cartel exposure.

The academics believe that their results may be extended beyond price-fixing companies to any that are actively concealing aspects of their financial performance or health.

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