Detecting and Predicting Financial Statement Fraud: The Effectiveness of the Fraud Triangle and SAS No. 99

40 Pages Posted: 6 Nov 2008  

Christopher J. Skousen

Utah State University - School of Accountancy

Kevin R. Smith

Utah Valley University

Charlotte J. Wright

Oklahoma State University - Stillwater

Date Written: October 28, 2008

Abstract

This study empirically examines the effectiveness of Cressey's (1953) fraud risk factor framework adopted in SAS No. 99 in detection of financial statement fraud. According to Cressey's theory pressure, opportunity and rationalization are always present in fraud situations. We develop variables which serve as proxy measures for pressure, opportunity and rationalization and test these variables using publicly available information relating to a set of fraud firms and a matched sample of no-fraud firms. We identify five pressure proxies and two opportunity proxies that are significantly related to financial statement fraud. We find that rapid asset growth, increased cash needs and external financing are positively related to the likelihood of fraud. Internal versus external ownership of shares and control of the board of directors are also linked to increased incidence of financial statement fraud. Expansion in the number of independent members on the audit committee, on the other hand, is negatively related to the occurrence of fraud. Further testing indicates that the significant variables are also effective at predicting which of the sample firms were in the fraud versus no-fraud groups.

Keywords: Fraud detection, fraud risk factors, SAS No. 99

Suggested Citation

Skousen, Christopher J. and Smith, Kevin R. and Wright, Charlotte J., Detecting and Predicting Financial Statement Fraud: The Effectiveness of the Fraud Triangle and SAS No. 99 (October 28, 2008). Available at SSRN: https://ssrn.com/abstract=1295494 or http://dx.doi.org/10.2139/ssrn.1295494

Christopher J. Skousen (Contact Author)

Utah State University - School of Accountancy ( email )

College of Business
Logan, UT 84322-3540
United States

Kevin R. Smith

Utah Valley University ( email )

800 West University Parkway
Orem, UT 84058
United States

Charlotte J. Wright

Oklahoma State University - Stillwater ( email )

Stillwater, OK 74078-0555
United States

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