Question

Pay Incentives and Fraudulent Activity

Many management contracts include pay incentives. Are these incentives an invitation to commit fraud? Who determines whether management has achieved its goals? Are there certain types of incentives that would be less likely to be associated with fraud associated?

Answer 1

As we normally see that most of the organizations offer incentives plans for their employees to achieve objectives of the organization hence incentives are not an invitation to commit fraud but we also see that some employees use fraudulent activities for achieving their set targets so that they can get their incentives. Hence we can say that incentives automatically do not an invitation to commit fraud but some loopholes in the organization may motivate their employees to commit fraud to achieve their targets because incentives are based on targets.

We also know that some organizations offer stock option as an incentive hence employees can use fraudulent activities to increase the value of their received stock options hence indirectly incentives motivate employees to commit fraud but not a direct invitation to commit fraud.

Yes, there are certain types of incentives that would be less likely to be associated with fraud associated. Suppose an organization can offer incentives based on the multi-years performance because in case of multi-years performance, an employee can not hide his fraud from auditors & internal supervisor, hence we can say that management or board of director should offer incentives based on the performance of multi-years so that goals of the organization can be achieved and fraudulent activities can be minimized as well.