Elements of Fraud Hexagon and Financial Statement Fraud

The Moderating Effect of Tone at the Top

Abstract

This study investigates the moderating effect of Tone at the Top on the relationship between the elements of fraud hexagon and financial statement fraud (FSF). Adopting an ex-post facto, longitudinal research design, and secondary data were collected from financial sector companies listed on the Nigerian Exchange (NGX) over a twelve-year period. FSF was measured using the Beneish M-Score model, while pressure, opportunity, rationalization, capability, ego and collusion were operationalized using relevant financial ratios and governance indicators. Tone at the Top was measured through text analysis of the Chairman’s Statement. The study further controlled for Return on Assets (ROA), Market Capitalization (MCAP), and Firm Size (FSIZ) to ensure accuracy and validity of the analysis. Panel regression analysis was conducted with the Hausman’s test result justifying the use of the Random Effects Model. Results show that pressure, opportunity, rationalization, ego, and collusion significantly influence FSF, while capability does not. Furthermore, Tone at the Top significantly moderates the relationship between pressure, opportunity, ego, collusion and FSF. These findings contribute to existing fraud literature by extending empirical validation of the Fraud Hexagon model and highlight the critical role of leadership communication in fraud prevention. Recommendations for policy, practice, and further research are also provided.