Firm-related risk factors and the likelihood of financial statement fraud in the Philippines (period 2000-2009)

• Main Authors: Fernandez, Katrina Cartilla, Huang, Michelle Albertte San Luis, Medina, Monette Tan, Militante, Kristin Agawin
• Format: text
• Language: English
• Published: Animo Repository 2012
• Subjects: Misleading financial statements > Philippines; Financial statements > Philippines; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/18345
• Institution: De La Salle University

This study determines a set of firm-related fraud risk factors that affect the likelihood of financial statement fraud in the Philippines. Using Donald R. Cressey's 1953 fraud triangle that identifies the factors that contribute to fraud, proxy variables are derived that are suitable to the Philippine setting. The variables are tested using logit regression with the use of fraudulent firms accused by the SEC and the matching non-fraudulent firms. The results of the study show that among the variables in Cressey's fraud triangle, only opportunity and rationalization are significant, not pressure thus Cresseys' framework is not applicable in the country. CEO, an opportunity variable implying that if the CEO of the company also acts as the chairman of the board, then there is more opportunity for the person to commit fraud, and AUDREPORT, a proxy variable for rationalization claiming that when the audit opinion contains additional language then the likelihood of fraud increases, are the main drivers of the perpetration of fraudulent financial reporting in the Philippines. However, both of these factors must be present for fraud to be committed. The offender must have the opportunity to commit fraud and rationalization that justifies the crime. Opportunity unlocks the doorway to fraud while rationalization draws the person towards it. This study also constructs a fraud prediction model, based on the fraud risk factors identified, suitable to the Philippine setting. The model derived successfully predicts the likelihood of a firm to commit fraud through publicly available information 88.89% of the time.