Theory and Factors Influencing Fraud in Financial Statements: A Systematic Literature Review

Abstract

Financial statements fraud is an effort made on purpose by management of a company to deceive and mislead the financial report. Employing a systematic literature review method, this study examines theories and determinants of financial statements fraud. We find four prominent theories in relation to fraud in financial statements, namely, “Fraud Triangle Theory”, “Fraud Diamond Theory”, “Fraud Scale Theory”, and “Fraud Pentagon Theory”. Based on fraud diamond theory, there are three factors affect fraud which are Nature of industry, Total accrual and Capability. Based on fraud scale theory, there are three factors affect fraud which are Pressure, Opportunity and Personal integrity. Based on fraud pentagon theory, there are five factors affect fraud which are Competence, Arrogance, Pressure, Opportunity and Rationalization. We also document a common theme among four different theories, such as opportunity, incentive, pressure, integrity, competence and rationalization as factors influencing financial statements fraud).