Fraudulent Signals From Within: The Triangle of Pressure, Opportunity, and Rationalization in Financial Reporting

This study explores the influence of financial stability, financial distress, and accrual on fraudulent financial reporting, with managerial ownership as a moderating variable, within the framework of the fraud triangle theory. Each independent variable represents a specific element of the fraud triangle: financial stability reflects pressure, financial distress represents opportunity, and accrual reflects rationalization. This study analyzes 320 firm-year data points derived from listed manufacturing firms within Indonesia’s consumer cyclicals sector over the 2020–2023 period. To investigate the relationships among the variables, the research employs panel data estimation techniques, utilizing the Fixed Effects Model alongside Moderated Regression Analysis. The results reveal that financial distress and accrual significantly affect fraudulent financial reporting, though both show negative coefficients. Notably, the negative direction of accrual does not indicate lower fraud risk, but rather the use of negative accruals—such as income smoothing or big bath accounting—which are conservative yet still manipulative. Financial stability shows no significant effect. Managerial ownership positively influences fraud and significantly strengthens the effects of financial distress and accrual, emphasizing the entrenchment effect. These findings highlight how elements of the fraud triangle interact with internal governance mechanisms, offering practical implications for auditors, regulators, and investors to improve fraud detection and prevention strategies.