MISREPORTING AND THE FRAUD TRIANGLE: INCENTIVE ALIGNMENT AND POWERFUL CEOS IN THE TECHNOLOGY INDUSTRY

Abstract

Prior literature suggests that incentive-based compensation incentivizes CEOs to manipulate earnings. Research has also shown that CEO power makes it easier to orchestrate such manipulations. By the end of 2019, each of the top five most valuable publicly traded companies in the world was a U.S. technology company, and thus this paper looks specifically into the incentive alignment and power of CEOs in this industry and their effects on financial misreporting. Are powerful CEOs in the technology industry with the incentives and opportunities to misreport more likely to misreport? Contrary to prior literature, we find evidence that suggests the more aligned a CEO’s wealth through stock options are with their company, the less likely a misstatement is to occur. In line with prior literature, we find that with the increasing power of a CEO, specifically where the CEO is also the Chairman of the Board, the more likely a misstatement is to occur. Our findings confirm predictions regarding how dangerous absolute power can become when it is combined with the role of leading a multi-billion-dollar technology firm. With the technology industry dominating the financial markets, it becomes even more important to monitor its leaders.