Corporate Fraud, Governance and Auditing

Giovanni Immordino and Marco Pagano

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We analyze corporate fraud in a model where managers have superior information but, due to private benefits from empire building, are biased against liquidation. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To restrain fraud, shareholders optimally choose auditing quality and the performance sensitivity of managerial pay, taking into account external corporate governance and auditing regulation. For given managerial pay, it is optimal to rely on auditing when external governance is in an intermediate range. When both auditing and managerial incentive pay are used, worse external governance must be balanced by heavier reliance on both of these incentive mechanisms. In designing managerial pay, equity can improve managerial incentives while options worsen them.

Keywords: accounting fraud; auditing; managerial compensation; corporate governance; regulation (search for similar items in EconPapers)
JEL-codes: G28 K22 M42 (search for similar items in EconPapers)
Date: 2008-09-01, Revised 2012-04-26
New Economics Papers: this item is included in nep-acc, nep-bec, nep-cta, nep-law and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published in the Review of Corporate Finance Studies, 2012, 1(1), pp. 109-133.

Downloads: (external link)
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Related works:
Journal Article: Corporate Fraud, Governance, and Auditing (2012)
Working Paper: Corporate Fraud, Governance and Auditing (2009)
Working Paper: Corporate Fraud, Governance and Auditing (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:203

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