Fraudulent Financial Reporting in Malaysia: From Fraud Triangle Theory Perspective

Abstract

Fraudulent financial reporting (FFR) activities have a negative impact on market value, companies' reputation, accounting profession credibility, and loss of investors' confidence in financial statements. Despite the establishment of new regulations and governance, the FFR cases in Malaysia keep on growing. The involvement of top management in fraud cases is induced by fraud triangle components, namely pressure, opportunity, and rationalisation. However, the impact of fraud triangle elements on fraudulent financial reporting is inconclusive. Hence, the objectives of this study are twofold: to determine the trend of fraudulent financial reporting in Malaysia for five years from 2016 to 2020 and to examine whether the fraud triangle elements have a significant impact on fraudulent financial reporting. This study used the Binary Logistic Regression model to achieve its second objective. The independent variables used to determine fraudulent financial reporting comprise fraud triangle elements, namely pressure, opportunity, and rationalisation. The fraudulent financial reporting is proxied by M-score of the Beneish model. This study provides empirical evidence that even though pressure and opportunity have no significant relationship with fraud likelihood, rationalisation has a significant impact on fraudulent financial reporting. Besides contributing to the literature on corporate fraud issues, this study offers imperative insights to financial information users in determining the possibility or indication of fraudulent reporting. Future research may incorporate other proxies for fraud triangle elements to augment this study or include companies with specific fraud cases, such as PN17.