Detecting and predicting financial statement fraud: The effectiveness of the fraud triangle and SAS No. 99

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, however, 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.