Do the fraud triangle components fuel complex financial fraud? A study of nonfinancial firms in Pakistan

Abstract

Purpose Financial fraud is a severe corporate fraud committed for achieving various objectives, like attaining financial targets, lowering debt and providing good signals to the market. Such financial fraud deceives stakeholders and results in substantial financial losses. This study aims to detect financial fraud using the modified Beneish M-Score, the most appropriate forensic tool for fraud detection. Furthermore, the current study also examines the influential role of the fraud triangle’s elements (pressure, opportunity and rationalization) on financial fraud in nonfinancial firms during 2018–2021, offering insight for understanding and mitigating fraudulent activities in the corporate world. Design/methodology/approach Financial fraud is treated as a dependent variable measured through a modified Beneish M-score, while the fraud triangle elements (pressure, opportunity and rationalization) are measured through six proxies, which are financial stability, leverage, financial target, nature of the industry, the effectiveness of supervision and auditor changes. Findings The study's finding proclaimed that fraud triangle elements result in financial fraud. Findings unveil that all elements (pressure, opportunity and rationalization) of the fraud triangle significantly influence financial fraud. The study confirms that these elements must be considered to protect investors and provide a safe environment for investment. Originality/value Rare literature found addressing the detection of financial fraud and its nexus with the fraud triangle specifically in Pakistan where deficient governance is notably prevalent. This study attempts to fill such a gap and contribute to knowledge.