Fraud Risk Factors of Fraud Triangle and the Likelihood of Fraud Occurrence: Evidence from Malaysia

Shabnam Fazli Aghghaleh,Zakiah Muhammaddun Mohamed

doi:10.22610/imbr.v6i1.1095

Abstract

The current research studies the usefulness of Cresseyâ€™s fraud risk factor framework adopted from SAS No. 99 to prevent fraud from occurring. In accordance with Cresseyâ€™s theory, pressure, opportunity and rationalization are existing when fraud occurs. The study suggests variables as proxy measures for pressure and opportunity, and test these variables using publicly available information relating to a set of fraud firms and a sample of no-fraud firms. Two pressure proxies and two opportunity proxies are identified and suggested to be significantly related to financial statement fraud. We find that leverage and sale to account receivable are positively related to the likelihood of fraud. Audit committee size and board of directorsâ€™ size are also linked to decrease the level of financial statement fraud. A binary logistic model based on examples of fraud risk factors of fraud triangle model measures the likelihood of financial statement fraud and can assist experts.

Highlights

Increasing the number of financial frauds such as Enron and WorldCom rise public concern regarding the reliability of financial statements
Using 40 fraud firms and 100 non-fraud firms, this study examines whether the proxy variables for fraud risk factors are correlated to likelihood of financial statement fraud
The results indicate that the difference in audit committee size between fraud and non-fraud companies is significant at 1% level, which indicate that companies with fewer audit committee members experience more fraud

Summary

Introduction

Increasing the number of financial frauds such as Enron and WorldCom rise public concern regarding the reliability of financial statements. Organizations commonly try to investigate on detecting frauds rather than prevention. There are numbers of studies on fraud, the Association of Certified Fraud Examiners (ACFE 2012) reported a high percentage of fraud occurrence worldwide. The report analyzed 1388 fraud cases globally and categorized fraud into three groups of asset misappropriation, corruption and financial statement fraud. The findings indicated that asset misappropriation has the most frequency with more than 86 percent of cases but caused the lowest range of loss at US$ 120000. Financial statement fraud involved less than 8 percent of the cases, but the majority of losses were related to this category with US$ 1 million

Methods

Results

Conclusion