Business and Management INK

Providing CEOs With Opportunities to Cheat

February 10, 2013 763

What motivates CEOs to misreport financial results?

Hermann Achidi Ndofor of Texas A&M University, Curtis Wesley of Indiana University, and Richard L. Priem of Texas Christian University and LUISS Guido Carli University published “Providing CEOs With Opportunities to Cheat: The Effects of Complexity-Based Information Asymmetries on Financial Reporting Fraud” in the Journal of Management’s OnlineFirst section. The abstract:

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Opportunities for financial reporting fraud arise because of information asymmetries—often labeled “lack of transparency”—between top managers and their diverse shareholders. We evaluate the relative contributions of information asymmetries arising from industry-level and firm-level complexities to the likelihood of top managers committing financial reporting fraud. Using a sample of 453 matched pairs of firms that have and have not been identified as having committed financial reporting fraud, we found that information asymmetries arising from industry- and firm-level complexities increase the likelihood of financial fraud. Moreover, more CEO stock options increase the likelihood of fraud when industry complexity is high, while aggressive monitoring by the audit committee reduces the likelihood of reporting fraud when firm-level complexity is high.

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