Fraudulent Financial Reporting: A Quantitative Study of the Fraud Triangle Theory and the Magnitude of Misstatement

摘要

The fraud triangle theory is considered to be the most popular theory used among anti-fraud community. Auditing standards, such as SAS No. 99, AS 2110, and AU-C 240, adopted this theory as their framework for identifying significant fraud risks by assessing both the likelihood and the magnitude of a potential misstatement. A literature review on the topic of fraudulent financial reporting discovered that accounting researchers have extensively examined the relationships between the three fraud triangle elements and the likelihood of fraud through quantitative studies. However, it was also revealed that there had been a lack of research on the relationships between these elements and the magnitude of misstatement. Recognizing this research gap, the current research modeled on Roden, Cox, and Kim (2016), which found six significant fraud risk factors for detecting the likelihood of fraud. Serving as a continuation of the research by Roden et al., this study used their significant variables to construct a multiple linear regression model that aimed to predict the magnitude of misstatement among a sample of 108 U.S. publicly traded firms that committed fraudulent financial reporting after the enactment of Sarbanes-Oxley Act of 2002 (SOX). The results showed that the fraud risk factors of share-ownership of directors and executives, CEO as board chair, directors' tenure, directors' gender, board independence, and audit quality were statistically non-significant in predicting the magnitude of misstatement. This study concluded that while the fraud triangle theory can be used to predict the existence of fraudulent financial reporting, its elements do not help explain the reasons why the magnitude of misstatements in certain fraud cases are greater than the other. Further research is recommended to explore characteristics other than the fraud triangle elements in order to gain a deeper understanding on the behaviors that influence the magnitude of misstatement.