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

Don Lux, Vasant Raval and John Wingender

Journal of Financial Crime, 2022, vol. 30, issue 5, 1291-1304

Abstract: Purpose - The 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/approach - Using 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. Findings - There 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/implications - This study represents the first empirical test of the disposition-based fraud model using intertemporal rewards leading to judgment shift. Practical implications - Executive compensation structure should reduce intertemporal rewards for executives reducing judgment shifts that can result in risk of fraud. Originality/value - This study addresses how executive compensation structure can result in fraud.

Keywords: Financial fraud; Executive fraud; Executive compensation structure; Intertemporal rewards; Self-regulation; Value judgment shift (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfcpps:jfc-07-2022-0162

DOI: 10.1108/JFC-07-2022-0162

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