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The Pursuit of Profits: How Ethics and Targets Influence Corporate Fraud
Jose R Hernandez,
Vrije Universiteit Amsterdam
Tom Groot, Vrije Universiteit Amsterdam
ABSTRACT. This study investigates the effect of performance targets, profits, and ethics on Dutch auditor fraud perceptions, observations, and experiences across 5,600 client audits. Based on structural equation analyses, this study unexpectedly finds that auditors perceive: (1) higher profitability levels at organizations as associated with higher fraud propensity; (2) the more consistent, experienced, and target-focused organizations appear to be most associated with fraud; and (3) senior management ethical concerns are of highest importance in relation to corporate fraud. The outcome of the study support the concerns of Jensen (2003) on the gaming and lies triggered by budget processes, and calls for reform on how organizations work with targets. Questions are raised on capital market behaviour, which generally rewards managers for income smoothing (lowers perceived volatility) but may fail to consider a fraud risk premium from the erosion of management ethics.
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