The Role of Corporate Governance Mechanisms, Executive Compensation and Regulatory Regimes in Global Incidence of Corporate Financial Fraud
I propose and test a dynamic model of corporate fraud pyramid using tax fraud, accounting and management compensation controversies (MCC). The pyramid facets represent the explanatory dimensions of corporate governance mechanisms, quality of audit and regulatory regimes, and executive compensation. I find that large-sized firms with bigger boards invariably indulge in tax fraud. Conversely, older firms, firms paying higher executive compensation, exhibiting greater audit committee expertise and greater board meeting frequency curtail tax fraud incidence. Increased board meeting frequency, firm age, senior executive compensation and firm size is associated with increase in accounting controversies. Conversely, increased gender diversity curtails accounting fraud. Increase in firm size, senior executive compensation and outsider director’s compensation is associated with increased MCC incidence. CEO duality, single biggest owner, regulatory quality, rising EPS and operating profit margin, linking CEO compensation with total shareholder return and audit committee management independence significantly curtail MCC incidence. Increased stock-based compensation is accompanied by an increase in MCC. Audit and nomination committees and board members may not be truly independent. Firms audited by Big4 auditors have the least chance of getting entangled in accounting controversies. However, firms paying higher audit fee have a greater tendency of indulging in accounting fraud. Firms exposed to better regulatory quality environment have a much greater chance of getting involved in tax fraud controversies. Various explanatory variables behaved differently before, during and after the financial crisis. Univariate analyses support the majority of results of multivariate analyses.
Corporate fraud, Corporate governance, Managerial factors, Tax fraud, Audit quality
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