Fraudulence detection in financial reporting by Pentagon approach: using F-score model in banking and financial sector companies on Ho Chi Minh city stock exchange, 2021

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIET NAM

BANKING UNIVERSITY OF HO CHI MINH CITY

FACULTY OF ACCOUNTING AND AUDITING

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GRADUATE THESIS

FRAUDULENCE DETECTION IN FINANCIAL

REPORTING BY PENTAGON APPROACH:

USING F-SCORE MODEL IN BANKING

AND FINANCIAL SECTOR COMPANIES

ON THE HO CHI MINH CITY STOCK EXCHANGE

Instructor: MAcc. Mai Hong Chi

Implementer: Nguyen Thi Quyen Linh

Student ID: 030805170355

Class: HQ05-GE12

Batch: 5

HO CHI MINH CITY, YEAR 2021

ABSTRACT

This graduate thesis aims to examine whether five elements of pentagon fraud

theory regarding pressure, opportunity, competence, arrogance, and rationalization - five

of which are developed into thirteen independent variables, namely, Fiancial Target,

Financial Stability, External Pressure, Institutional Ownership, Company Growth,

Liquidity, Inefective Monitoring, Nature of Industry, Change of Auditor, Total Accruals,

Quality of external auditor, Change of directors, and CEO Picture – have a significant

influence on fraudulent financial reporting in banking and financial sector companies

listed on Ho Chi Minh Stock Exchange (HSX) during five-year period from 2016 to

2020. Besides, this thesis uses F-score model as a tool of estimating the risk level of

fraudulent financial reporting, which showed as an independent variable.

The population in this thesis are the whole banking and financial sector companies

listed on Ho Chi Minh Stock Exchange from 2016 to 2020 and this thesis is conducted

by quantitative method with secondary data is used; besides, with purposive sampling

technique, there are 90 samples in observation. Aside from that, logistic regression

analysis is used in this thesis as a data analysis method and the author uses SPSS 20

software as a data processing tool.

The results expressed that external pressure and institutional ownership have a

positive effect on fraudulent financial reporting and ineffective monitoring has a

negative effect on fraudulent financial reporting, whereas, the rest of independent

variables are mentioned have no effect on fraudulent financial reporting. From this

optained results, the author highly recommends for corporates and auditors in truly

disclosing information on audited financial reporting.

Keywords: Fraud Pentagon, Fraudulent financial reporting, Pressure, Opportunity,

Rationality, Competence, Arrogance, F-score model.

ASSURANCE

The author commits that this graduate thesis: “Fraudulence Detection In Financial

Reporting By Pentagon Approach: Using F-Score Model In Banking And Financial

Sector Companies On The Ho Chi Minh City Stock Exchange” has been performed by

the endeavor of the author and the enthusiastic guideline of Macc. Mai Hong Chi over

the past time.

Numerical data and research results in this thesis are honest and fully uncopied or disused

for any similar research subject. If it’s spotted that there is a copy of the research result

from other research subjects, I will totally take responsibility for this thing.

Thu Duc city, June 27th , 2021

The author

Nguyen Thi Quyen Linh

ACKNOWLEGEMENTS

The author would like to expression the deepest and most sincere gratitude to my

scientific instructor, Macc. Mai Hong Chi, have enthusiastic and conscientious tutorials

to the author’s thesis over the course of performing this graduate thesis.

Then, the author would like to send my sincere thanks to the collective of lecturers at

Banking University of Ho Chi Minh city in general, and especially, lecturers in the

Faculty of Accounting and Auditing in particular, who have taught the author over the

past years since I did the reseach paper in the first time. Thanks to their teaching lessons,

the author has just accumulated and applied these useful knowledge for the author’s

thesis.

Ultimately, the author would like to express the the sincerest thanks to the whole my

family members, those who always stands by the author, encourages the author, and

facilitates the author all respects over the period; thereby, the author has just finalized

this graduate thesis.

Respectfully.

Thu Duc city, June 27th, 2021

The author

Nguyen Thi Quyen Linh

CONFIRMATION OF THE INSTRUCTOR

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INSTRUCTOR’S SIGNATURE

Macc. MAI HONG CHI

TABLE OF CONTENTS

Contents

ABSTRACT.....................................................................................................................2

ASSURANCE..................................................................................................................3

ACKNOWLEGEMENTS................................................................................................4

CONFIRMATION OF THE INSTRUCTOR..................................................................5

ENUMERATION OF DIAGRAM AND TABLE AND PICTURE .............................10

CHAPTER 1...................................................................................................................11

1.1. THE NECESSITY OF THE STUDY...............................................................11

1.2. RESEARCH OBJECTIVES................................................................................12

1.3. RESEARCH QUESTIONS .................................................................................13

1.4. RESEARCH METHODOLOGY .......................................................................13

1.5. SUBJECT AND SCOPE OF THE STUDY........................................................13

1.5.1. Subject ...........................................................................................................13

1.5.2. Scope .............................................................................................................13

1.6. CONTRIBUTIONS OF THE STUDY................................................................13

1.7. THE INNOVATIVE............................................................................................14

1.8. THESIS STRUCTURE .......................................................................................14

CHAPTER 2...................................................................................................................15

2.1. RELATED CONCEPTS.....................................................................................15

2.1.1. Fraud..............................................................................................................15

2.1.2. Financial reporting fraudulence ....................................................................16

2.1.3. Pentagon fraud theory ...................................................................................18

2.2. THEORETICAL FRAMEWORK.......................................................................22

2.2.1. Effects of Pressure on Fraudulent Financial Reporting ................................22

2.2.2. Effects of Opportunity on Fraudulent Financial Reporting ..........................24

2.2.3. Effects of Rationalization on Fraudulent Financial Reporting .....................26

2.2.4. Effects of Competence or Capability on Fraudulent Financial Reporting....28

2.2.5. Effects of Arrogance on Fraudulent Financial Reporting. ............................29

2.3. PREVIOUS RESEARCH....................................................................................31

CONCLUSION OF CHAPTER 2..................................................................................37

CHƯƠNG 3 ...................................................................................................................38

3.1. RESEARCH FRAMEWORK .............................................................................38

3.2 RESEARCH METHOD .......................................................................................39

Data collection method: Quantitative research .......................................................39

3.3. RESEARCH MODEL: F-SCORE MODEL .......................................................39

3.4. HYPOTHESIS DEVELOPMENT ......................................................................41

3.4.1. Pressure is proxied by six following independent variables: ...........................41

3.4.1.1. Financial target (ROA)...............................................................................41

3.4.1.2. Financial stability (FINST) .......................................................................43

3.4.1.3. External pressure (LEV)............................................................................45

3.4.1.4. Institutional ownership (INST) ..................................................................47

3.4.1.5 Compny growth (CG)..................................................................................48

3.4.1.6. Liquidity (CR)............................................................................................49

3.4.2. Opportunity is proxied by two following independent variables: ....................51

3.4.2.1. Ineffective monitoring (BDOUBT)...........................................................51

3.4.2.2. Nature of industry (REC) ...........................................................................52

3.4.3. Rationality is proxied by three following independent variables.....................54

3.4.3.1. Change of auditor (AUCHANGE).............................................................54

3.4.3.2. Total accruals (TATA)..............................................................................56

3.4.3.3. Quality of external auditor (BIG)...............................................................57

3.4.4. Competence is proxied by following independent variable: ............................59

3.4.4.1. Change of directors (DCHANGE) .............................................................59

3.4.5. Arrogance is proxied by following independent variable: ...............................60

3.4.5.1. CEO Picture (CEOPIC).............................................................................60

3.5. DADA ANALYSIS METHOD..........................................................................62

3.5.1. Descriptive data.............................................................................................62

3.5.2. Logistic Regression Analysis........................................................................64

3.6. OPERATIVE DEFINITION OF VARIABLES AND MEASURES..................68

3.4.1. Dependent variable (Y) ................................................................................69

3.4.2. Independent variables (X) ............................................................................70

3.7. DATA COLLECTION ........................................................................................72

3.7.1. Research design ................................................................................................72

3.7.2. Research process...............................................................................................73

3.7.3. Data processing tool .........................................................................................75

CONCLUSION OF CHAPTER 3..................................................................................76

CHAPTER 4...................................................................................................................77

4.1. RESULT DISCUSSION......................................................................................77

4.1.1. Descriptive analysis for variables with ratio scale ........................................77

4.1.2. Descriptive analysis for variables with nominal scale ..................................80

4.1.3 The goodness of fit test ..................................................................................81

4.1.4. Overall Model Fit ..........................................................................................81

4.1.5. Nagelkerke R Square.....................................................................................82

4.2. HYPOTHESIS TESTING DISCUSSION...........................................................83

4.2.1. Hypothesis testing .........................................................................................83

4.2.2. Hypothesis testing discussion........................................................................85

CHAPTER 5: .................................................................................................................89

5.1. CONCLUSION....................................................................................................89

5.3. SUGGESTION ....................................................................................................89

5.2. LIMITATION......................................................................................................93

ENUMERATION OF DIAGRAM AND TABLE AND PICTURE

Diagram

Diagram 1.Research framework

Diagram 2. Hypothesis development

Table

Table 1. Overview of previous researches

Table 2. Description of dependent variable and independent variables

Table 3. Descriptive Statistics with ratio scale

Table 4.1 Descriptive Statistic with nominal scale

Table 4.2 Descriptive statistic with nominal scale

Table 4..3. Descriptive Statistics with nominal scale

Table 5. The goodness of fit test

Table 6. Overall Model Fit

Table7. Nagelkerke R Square

Table 7. 1. Hypothesis testing

Table 8.2. Hypothesis testing

Picture

Picture 1. Crowe's Fraud Pentagon