Compensation structure impact on executive value judgment shift resulting in occurrence of fraud

Abstract

PurposeThe purpose of this study is to examine whether executive compensation structure is a predictor of a value judgment shift facilitating fraud. The Raval (2018) disposition-based fraud 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 delayed compensation in performance-based incentives.Design/methodology/approachUsing an archival data set consisting of frauds identified through Securities and Exchange Commission Accounting and Auditing Enforcement Releases, the compensation structure of executives involved in frauds is compared against the compensation structure of executives in a peer control group.FindingsThere was a significant difference in the intertemporal rewards of the compensation structures between the two groups, indicating that compensation structure presents intertemporal choices leading to a judgment shift that influences the deliberate action of fraud.Research limitations/implicationsThis study represents the first empirical test of the disposition-based fraud model using intertemporal rewards leading to judgment shift.Practical implicationsExecutive compensation structure should reduce intertemporal rewards for executives reducing judgment shifts that can result in risk of fraud.Originality/valueThis study addresses how executive compensation structure can result in fraud.