Compliance Culture as a Mediator of Internal Control Quality and Financial Fraud Risk

This study examines the effect of internal control quality on financial fraud risk among publicly listed firms in Nigeria, with particular emphasis on the mediating role of compliance culture. Using a balanced panel of 152 Nigerian Exchange Group (NGX) listed firms observed over the 2015–2024 period, the study adopts a quantitative research design and applies panel regression techniques to analyze the relationships among internal control quality, compliance culture, and financial fraud risk, while controlling for firm size, board independence, audit quality, and firm leverage. Random effects estimation, supported by post-estimation diagnostics, is employed to address firm-level heterogeneity and ensure robust inference. The findings reveal that internal control quality has a significant and negative effect on financial fraud risk, indicating that stronger control systems reduce firms’ exposure to fraudulent activities. Compliance culture also exerts a significant negative effect on fraud risk and partially mediates the relationship between internal control quality and financial fraud risk, demonstrating that internal controls are more effective when embedded within a strong ethical and compliance-oriented organizational culture. Furthermore, firm size, board independence, and audit quality are found to mitigate fraud risk, while firm leverage significantly increases fraud exposure. These results remain robust after controlling for heteroskedasticity and serial correlation. The study contributes to the fraud risk and corporate governance literature by integrating structural and behavioural perspectives and highlighting compliance culture as a critical mechanism linking internal controls to fraud outcomes. The findings offer important implications for regulators, boards, auditors, and investors seeking to strengthen fraud prevention frameworks in emerging markets.