Efficacy of fraud triangle model in the detection of fraudulent financia reporting in South African Municipalities

Abstract

The purpose of this study is to investigate the efficacy of the - Fraud Triangle Model - in the detection of fraudulent financial reporting in South African Municipalities. Fraudulent financial reporting and misappropriation of assets tend to undermine investors’ confidence in audited financial statements. Prior studies have reported the high financial cost of fraudulent financial reporting from municipalities and the subsequent impact on capital and financial markets. The Auditor General, South Africa, (AGSA) has lamented over the high number of irregular, fruitless and wasteful as well as unauthorised expenditure in South African municipalities, over the past decade. This study uses the fraud triangle model as the theoretical framework to investigate the underlying causes of fraudulent financial reporting in all 257 municipalities - Local, District and Metros - in South Africa over a six-year period - 2015/16 to 2020/21 financial years; the data was analysed using the binary regression model. The findings revealed that the fraud risk factors are correlated with the occurrence of fraudulent financial reporting. Additionally, the study found that the three fraud risk factors - pressure (proxied by financial leverage and liquidity), opportunity (measured by capital expenditure), and rationalization (proxied by total accruals and quality of external audit ) - have significant positive associations with the occurrence of fraudulent financial statements. The findings of the study provide new insights into the existing body of knowledge on financial statement fraud in the context of South African municipalities.