**1. Introduction**

In this paper, we first describe a "Broken Trust" theory that was introduced by Albrecht el al. (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 el al.'s (2004) Broken Trust theory. Like the Broken Trust theory, the American Dream theory relates to a "Fraud Triangle" concept to explain corporate executive fraud in America. 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 et al. (1999) found that CEOs were involved in 72% 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. In addition, we are motivated to provoke thoughts on corporate executive fraud in American society and to stimulate further empirical research on social variables of executive fraud.

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.

The American Dream and Corporate Executive Fraud 199

executives is Resource Dependency theory (Daily et al. 2003). This theory holds that the board of directors is boundary spanner of the company and its environment. It provides the corporate executives access to resources to which they would not normally have access. For example, a lawyer might be appointed to the board to provide legal advice to the executives. 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 independence from the corporate executives underlying the stewardship relationship may be partly to blame for the executives' fraudulent behavior. Psychology independence refers to the board's lack objectivity both affectively (e.g., directors can be blind sighted by their admiration for the corporate executives' persona) and cognitively (e.g., directors can be blind sighted by their belief in the corporate executives' expertise). A lack of psychological independence is a problem in many boardrooms across corporate America. As pointed out by Lorsch (2005), 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

Since Albrecht et al.'s (2004) Broken Trust theory is related to a "Fraud Triangle" concept from corporate fraud literature, we begin by describing the origin of the Fraud Triangle concept. Much of the current corporate fraud literature is based on the early work of Edwin H. Sutherland (1883-1950), a criminologist at Indiana University. Sutherland (1949) was particularly interested in fraud committed by the elite business executives against stockholders. He coined the term "white-collar crime" to mean criminal acts of corporations and individuals acting in their corporate capacity. One of Sutherland's Doctoral students was Donald R. Cressey (1919-1987). Cressey (1973) was especially interested in the circumstances that led embezzlers, whom he called "trust violators," to be overcome by temptation. His hypothesis about the psychology of the embezzlers was later become known as the "Fraud Triangle" concept, which consists of three variables: perceived financial need, perceived opportunity, and rationalization. In the early 1980s, the Fraud Triangle concept was adapted from criminology to accounting by Steve Albrecht of Brigham Young University. Albrecht was especially interested in identifying factors that led to occupational fraud and abuse. His study suggests that there are three variables involved in occupational fraud. Consistent with Cressey's Fraud Triangle concept: " … it appears that three elements must be present for a fraud to be committed: a situational pressure, a perceived opportunity to commit and conceal the dishonest act, and some way to rationalize the act as either being inconsistent with one's personal level of integrity" (Albrecht et al. 1984, p.5). Later, the *Statement on Auditing Standards No.99: Considerations of Fraud in a Financial Statement Audit* issued by the AICPA (2002) adopted much of Albrecht's work on the Fraud Triangle concept detailed in his book *Fraud Examination* (2003). The auditing standard also incorporated many fraud risk factors associated with the three variables of the Fraud Triangle concept: (1) a "pressure" such as a financial pressure to meet analysts' expectation, (2) an "opportunity" such as weak internal controls, and (3) some way to

the executives' fraudulent behavior.

"rationalize" such as "our stock options depend on it."

**2.3 Broken trust theory** 
