In this paper, we first describe a “Broken Trust” theory that was introduced by Albrecht, Albrecht, and Albrecht (2004) to explain corporate executive Fraud. The Broken Trust theory is primarily based on an “Agency” theory from economic literature and a “Stewardship” theory from psychology literature. We next describe an “American Dream” theory from sociology literature to complement Albrecht et al. (2004) Broken Trust theory. Like the Broken Trust theory, the American Dream theory relates to a “Fraud Triangle” concept to explain corporate executive Fraud. We are motivated to explain corporate executive Fraud because whenever corporate Fraud has been studied, CEOs and CFOs are most involved. For example, the COSO-sponsored study by Beasley, Carcello, and Hermanson (1999) found that CEOs were involved in 72 percent of the financial statement Fraud cases. The next most frequent perpetrators in descending order of frequency were the controller, COO, vice presidents, and members of the board.

We define “corporate executive Fraud” as follows. First, a corporate scandal is a scandal involving allegations of unethical behavior on the part of a company. It follows that a corporate accounting scandal is a scandal involving unethical behavior in accounting, that is, accounting Fraud. Accounting Fraud includes intentional financial misrepresentations (e.g., falsification of accounts) and misappropriations of assets (e.g., theft of inventory) (AICPA, 2002). Intentional financial misrepresentations involving the management of a company are referred to as corporate executive Fraud, whereas misappropriations of assets involving the employee of a company are referred to as employee Fraud. Taken together, corporate executive Fraud is intentional financial misrepresentations by trusted executives of public companies, which typically involve creative methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets, or underreporting the existence of liabilities.

Finally, we provide some anecdotal evidence from recent high profile corporate executive Fraud1 to explore the American Dream theory. We are well aware of the fact that anecdotal evidence is weak evidence without empirical validation. However, our paper is written to provoke thoughts on corporate executive Fraud in American society and to stimulate further empirical research on social variables of executive Fraud. We also believe that a better understanding of corporate executive Fraud would help to address some issues from a teaching perspective in our concluding thoughts.

2. Potential theories of corporate executive Fraud

Albrecht et al. (2004) describe a Broken Trust theory to explain corporate executive Fraud. It should be noted that they have never used the term “Broken Trust” in their theory. We took the liberty of labeling their theory as the Broken Trust theory. Since Albrecht et al. (2004) derive their Broken Trust theory by linking the Agency theory and Stewardship theory to the Fraud Triangle concept in corporate Fraud literature, we first describe the Agency theory, follow by the Stewardship theory, and then the Broken Trust theory. We are aware that research and publication in Agency and Stewardship theories are very extensive, but only those that are specifically related to corporate executive Fraud are cited in this paper.

2.1. Agency theory

Agency theory was introduced into management literature by Jensen and Meckling (1976). The theme is based on economic theory and it describes a principal–agent relationship between owners (such as stockholders) and executives, with top executives acting as agents whose personal interests do not naturally align with shareholder interests.

The principal–agent relationship involves a transfer of trust and duty to the agent while assuming that the agent is opportunistic and will pursue interests, including executive Fraud, which are in conflict with those of the principal. This potential conflict of interests is often referred to as “the Agency problem” (Davis, Shoorman, & Donaldson, 1997). A typical solution to the Agency problem is to structure executive incentives, such as stock options, in such ways that they align executive behavior with stockholder goals. Another common solution to the Agency problem is for the board of directors to control and curtail the “opportunistic behavior” of the executives by, for example, the audit committee (Donaldson & Davis, 1991).

However, the studies cited in Davis et al. (1997) indicate corporate executives are extremely complex human beings and the Agency problem persists. Recent studies by Daily, Dalton, and Canella (2003) and Sundaramurthy and Lewis (2003) also show that, in practice, corporate executives have power to counteract the board’s control over them. For example, the corporate executives can exercise influence over the board because they are more in tune with daily operations of the company, or they exercise influence over succession of the board to ensure that board members who agree with them are appointed. Finally, Bebchuk and Fried (2004) argue that corporate executives’ influence over the board of directors on pay setting can explain a wide range of compensation practices and patterns. This includes ones that have long been viewed as puzzles by economists such as why pay is higher and less sensitive to bad performance, including Fraud, in corporations in which executives are more entrenched or have more power vis-à-vis the board.

2.2. Stewardship theory

In contrast to Agency theory, Stewardship theory is based on psychology theory that views corporate executives as stewards of their companies who will choose the interests of the stockholders over the interests of self, regardless of personal motivations or incentives (Donaldson & Davis, 1991; Sundaramurthy & Lewis, 2003). Since the executives can be trusted to place stockholder interest first, the board of directors focuses on empowering rather than controlling the executives.2

Like Agency theory, Stewardship theory seeks the alignment of corporate executives with the stockholders interests. Also, like Agency theory, Stewardship theory cannot explain the complex behavior of the executives such as whether they will or will not break the trust and commit Fraud. For example, the board’s lack of psychological independence3 from the corporate executives underlying the Stewardship relationship may be partly to blame for the executives’ fraudulent behavior. A lack of psychological independence is a problem in many boardrooms across corporate America. As pointed out by Lorsch,4 directors tend to like and admire their corporate executives. They find it hard to penalize their corporate executives even when the company is doing badly and they tacitly tolerate the executives’ fraudulent behavior.