Factors of fraud triangle affecting the likelihood of material misstatements in financial statements: An empirical study

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Abstract

This study aims to identify and examine the three components of the fraud triangle theory that affect the likelihood of material misstatements in financial statements. With a sample of 150 listed companies from two stock exchanges in Vietnam, Ho Chi Minh City (HOSE) and Hanoi Stock Exchange (HNX) in 2019, this study uses multinomial logistic regression analysis to examine the relationship among factors. This study shows the impact of using the elements of the fraud triangle theory in forecasting the likelihood of material misstatement (Cressey, 1953; Romney et al., 1980). The results indicate that the following factors affect the possibility of material misstatements in financial statements of companies: debt ratio, return on assets, independence of the board members, selection of an audit firm, auditor change in comparison with the previous year, and historical financial statements with material misstatements. These findings of the study can be utilized to develop strategies to help identify companies that are likely to have material misstatements in their financial statements.

Keywords: Financial Statements, Fraud, Fraud Triangle, Material Misstatements, Vietnam

Authors’ individual contribution: Conceptualization — T.N.D.; Methodology — T.N.D.; Software — T.N.D.; Validation — T.T.T.; Formal Analysis — T.N.D.; Investigation — T.T.T.; Resources — T.T.T.; Data Curation — T.N.D.; Writing — Original Draft — T.N.D.; Writing — Review & Editing — T.T.T.; Visualization — T.T.T.; Project Administration — T.T.T.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: M40, M41, M42

Received: 26.04.2022
Accepted: 25.01.2023
Published online: 27.01.2023

How to cite this paper: Doan, T. N., & Ta, T. T. (2023). Factors of fraud triangle affecting the likelihood of material misstatements in financial statements: An empirical study. Journal of Governance & Regulation, 12(1), 82–92. https://doi.org/10.22495/jgrv12i1art8