Does Executive Compensation Affect Accounting Irregularities? Evidence From Listed Firms in Indonesia

Abstract

This research examined the association between executive compensation and accounting irregularities in Indonesia. Employing 1,100 firm-year observations during 2014 to 2017 period, we found that executive compensation is positively associated with accounting irregularities. This result is robust after we mitigated a serial order correlation of accounting irregularities and a self-selection bias using propensity score matching. We also discovered a positive relationship after considering alternative measures of accounting irregularities. Furthermore, we documented that the positive association between executive compensation and accounting irregularities is stronger for firms with higher board independence. Our findings provide important insights for regulators and Asian emerging market regulators who are considering promoting equity incentives for listed firms.

Two Decades of Accounting Fraud Research: The Missing Meso-Level Analysis

“…Other than socio-legal conditions, macro-economic and political factors are seen as determinants of corporate accounting fraud (Dellaportas et al, 2019; Soepriyanto et al, 2022; Stalebrink & Sacco, 2007; Street & Hermanson, 2019). Mironiuc et al (2012), in their study on financial indicators and the risk of fraud, found that, ostensibly, economic instability was one of the critical determinants of accounting fraud.…”

“…The micro-macro-level explanations of fraud reflect a shift in general sociological and psychological inquiry that emphasizes the importance of micro-macro connections as a more robust representation of corporate accounting fraud. The validity of the micro- and macro-level analyses of fraud has been thoroughly discussed by critical accounting scholars (see Choo & Tan, 2007; Morales et al, 2014; Soepriyanto et al, 2022), and from these accounts, it is safe to declare a consensus that fraud is a consequence of both micro- and macro-variables intersecting in various ways. Ironically, the consensus of the theoretical micro- and macro-level explanations of fraud lacks substantial empirical support, making it an unresolved empirical problem in accounting fraud research.…”

Does the income of the chief executive officer affect the quality of corporate financial statements? An evidence from industrial firms in Vietnam

“…This link between executive income and accounting irregularities has been observed to be linear. Nevertheless, it is essential to note that there is mixed evidence on the relationship between executive compensation and financial irregularities (low quality), as shown in various studies (e.g., Bergstresser & Philippon, 2006;Soepriyanto et al, 2022;Erickson et al, 2006;Harris & Bromiley, 2007). Most of this evidence has been documented in developed countries like the United Kingdom, the United States, and Australia.…”