‘No’ to stock-based compensation for directors: is there an association between directors’ compensation and financial statements fraud?

Using a unique dataset of fraud firms in the United States over a 15 year-period (2005–2019), this study investigates whether compensation for the board of directors has an association with financial statements fraud (FSF). It further investigates which components of the compensation package could be more amenable to this association. We find a positive association between the incidence of FSF and directors’ stock-based compensation. Considering the remedy mechanism for FSF, we find a negative association between FSF and the average age of directors. Additionally, Chief Executive Officer (CEO) duality, size/type of auditor, institutional ownership, accounting returns, and firm size all significantly influence the incidence of FSF. We contribute to the accounting, governance, and accountability literatures, while critiquing agency theory in advancing an alternative view that stock-based compensation for directors should be used with caution, as it may provide an incentive for FSF. This research has implications for businesses and regulators regarding the design of directors’ compensation packages.