Evaluating The Fraud Triangle Perspective in India’s Pharmaceutical Sector
Abstract
The research paper examines the usefulness of the Fraud Triangle Theory (FTT) in describing financial statement fraud in the context of the Indian pharmaceutical industry, where empirical research at a large scale is scarce. The analysis is done using a panel dataset of 135 listed pharmaceutical firms on NSE and BSE in the period 2014-2022, where the indicators of pressure, opportunity, and rationalization are taken (liquidity, solvency, asset turnover, firm size, and profitability ratios) to predict the occurrence of fraudulent financial reporting with the fraud proxy (qualified opinion, emphasis of matter content). The findings demonstrate that solvency risk (debt-to-equity ratio) is a huge determinant and more likely to generate fraud, and asset-based firms are less likely to declare fraudulent statements. Other pressure, opportunity, and rationalization proxies have weak explanatory power, implying that FTT has a minor role in explaining the levels of fraud in this industry. The results are informative to the auditors, regulators, and managers as they draw attention to the red flags associated with leverage, and the necessity to monitor financially strained pharmaceutical companies more closely, as well as to the shortcomings of using FTT and audit-opinion-based proxies in high-R&D industries. It is one of the first large-scale empirical estimates of the Fraud Triangle Theory in the pharmaceutical industry in India that provides industry-specific results and helps to fill the gaps in the research on fraud detection and regulation in the emerging economy.
About this article
Keywords
- Financial Statement Fraud
- Pharmaceutical Companies
- Fraud Triangle Theory
- Audit Opinion
- India
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