Abstract
The turn of the millennium is associated with increased corporate fraud, largely attributed to the failure of corporate governance. The compensation committee is expected to minimize fraud by rewarding only appropriate CEO behavior. A causal modeling approach, the Directed Acyclic Graph, was used to estimate the structure of corporate fraud. Corporate fraud was measured as illegal earnings statement(s), not all restatements but only those found illegal. A major finding is that the CEO's stock-option compensation motivates the CEO to commit corporate earnings fraud, while cash salaries and bonuses are only indirectly related to earnings fraud through those stock options. Copyright © 2010 John Wiley & Sons, Ltd.
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