The digital governance paradox: balancing governance benefits and fraud risks in digital transformation

Digital transformation creates both governance benefits and fraud risks, yet existing research has paid limited attention to how digital capabilities interact with governance capabilities. Drawing on the digital governance paradox perspective, this study develops an F-I-E Contingency Framework (financial buffering capacity, internal governance capacity, and external monitoring intensity) to examine the conditions under which digital transformation is associated with fraud risks. Using panel data from Chinese A-share listed firms during 2013–2022 and a semantic analysis approach to measure substantive digital transformation, we find that digital transformation is significantly associated with fraud risks. However, internal governance and external monitoring jointly constrain fraud risks associated with digital transformation. Strong profitability, effective internal controls, and negative media scrutiny mitigate fraud risks. Our study extends research on the dual effects of digital transformation by identifying its governance boundary conditions.