Fraud Risk Factor Of The Fraud Triangle Assessing The Likelihood Of Fraudulent Financial Reporting

Abstract

This research examines risk factors of the fraud triangle, core of all fraud auditing standards, for assessing likelihood of fraudulent financial reporting. Significant variables, including analyst’s forecast error, debt ratio, directors’ and supervisors’ stock pledged ratio, percentage of sales related party transaction, number of historical restatements, and number of auditor switch, belong to pressure/incentive, opportunity and attitude/rationalization. Results indicate fraudulent reporting positively correlated to one of the following conditions: more financial pressure of a firm or supervisor of a firm, higher percentage of complex transactions of a firm, more questionable integrity of a firm’s managers, or more deterioration in relation between a firm and its auditor. A simple logistic model based on examples of fraud risk factors of ISA 240 and SAS 99 gauges the likelihood of fraudulent financial reporting and can benefit practitioners.