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

Abstract

<p class="MsoNormal" style="text-justify: inter-ideograph; text-align: justify; line-height: 12pt; margin: 0in 36.1pt 0pt 0.5in; mso-line-height-rule: exactly;"><span style="font-family: Times New Roman;"><span style="font-size: 10pt;">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.</span><span style="font-size: 10pt; mso-fareast-font-family: DFKai-SB;"> Results indicate </span><span style="font-size: 10pt;">fraudulent reporting</span><span style="font-size: 10pt; mso-fareast-font-family: DFKai-SB;"> 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 </span><span style="font-size: 10pt; mso-font-kerning: 0pt;">deterioration in relation between a firm and its auditor</span><span style="font-size: 10pt; mso-fareast-font-family: DFKai-SB;">. A</span><span style="font-size: 10pt;"> 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.</span></span></p>