Compensation structure impact on executive value judgment shift resulting in occurrence of fraud
| Date | 10 October 2022 |
| Pages | 1291-1304 |
| DOI | https://doi.org/10.1108/JFC-07-2022-0162 |
| Published date | 10 October 2022 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Don Lux,Vasant Raval,John Wingender |
Compensation structure impact on
executive value judgment shift
resulting in occurrence of fraud
Don Lux,Vasant Raval and John Wingender
Heider College of Business, Creighton University, Omaha, Nebraska, USA
Abstract
Purpose –The purpose of thisstudy is to examine whether executive compensationstructure is a predictor
of a value judgment shift facilitatingfraud. The Raval (2018) disposition-basedfraud model theorizes that in a
fraud, a judgment shift occurs that results in an intentional action. Judgment shifts are influenced by
intertemporal rewards, an executive compensation structure comprising salary (immediate reward) and
delayedcompensation in performance-based incentives.
Design/methodology/approach –Using an archival data set consisting of frauds identified through
Securities and Exchange Commission Accounting and Auditing Enforcement Releases, the compensation
structure of executivesinvolved in frauds is compared against the compensation structureof executives in a
peer controlgroup.
Findings –There was a significant differencein the intertemporal rewards of the compensationstructures
between the two groups, indicating that compensation structurepresents intertemporal choices leading to a
judgmentshift that influences the deliberate action of fraud.
Research limitations/implications –This study represents the first empirical test of the disposition-
based fraudmodel using intertemporal rewards leading to judgment shift.
Practical implications –Executive compensation structure should reduce intertemporal rewards for
executivesreducing judgment shifts that can result in risk of fraud.
Originality/value –This studyaddresses how executive compensation structurecan result in fraud.
Keywords Financial fraud, Executive fraud, Executive compensation structure,
Intertemporal rewards, Self-regulation, Value judgment shift
Paper type Research paper
Introduction
In 2002, Congress passed the Sarbanes–Oxley Act (SOX) as a reaction to the numerous
corporate accounting scandals that were being discovered. SOX outlined the responsibilities of
a public corporation’s board of directors, outlined penalties for certain misconduct and
empowered the Securities and Exchange Commission (SEC) to create regulations regarding
public corporation compliance. It specifically identified corporate fraud and records tampering
as criminal offenses with specificpenalties. Additionally, SOX created a new agency, the Public
Company Accounting Oversight Board, responsible for overseeing and disciplining public
accounting firms particularly in respect to their auditingrole. In President Bush’s speech at the
signing ceremony, he referred to the passage of this legislation as one of the largest reforms of
American business practices sincethe Great Depression.
The disposition-based fraud model (DFM) proposed by Raval (2018) offers a model to
further understandfraud –what causes it to happen or not happen, so we can further extend
the understanding of fraud. One of the key components of DFM is that a judgment shift
occurs for the fraudsterresulting in an intentional action.
Compensation
structure
impact
1291
Journalof Financial Crime
Vol.30 No. 5, 2023
pp. 1291-1304
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-07-2022-0162
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
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