Factors affecting the quality of financial statements through the role of fraud prevention: a case study in Vietnam

Abstract

In recent years, especially after the COVID-19 pandemic, KPMG's Fraud Outlook Report (2022) highlights the rapid evolution of financial crime, with financial statement fraud becoming increasingly sophisticated and professional. Notable scandals such as those involving Evergrande and Van Thi Phat have emphasized the importance of maintaining a transparent financial environment. Preventing fraud is essential for users of financial information. Unlike many previous studies that focus on financial indicators and external factors, this research examines the influence of internal governance mechanisms— including “Internal Control”, “Internal Audit”, “Audit Committee”, and the “Whistleblowing System”- on the quality of financial statements. Additionally, recognizing the crucial role of “Risk-based Audit” in fraud management, and the lack of research on this topic, the research team integrates Risk-based Audit with these internal mechanisms to investigate their combined impact on financial reporting quality. The research employs a survey-based method, combining questionnaires with a quantitative approach. Primary data are collected, and Cronbach's alpha and EFA are applied to identify fraud prevention factors. Pearson correlation and SEM with SmartPLS version 4 are then used to assess the impact on financial reporting quality. The results show that factors such as “Internal Control”, “Internal Audit”, “Risk-based audit”, “Audit Committee”, and the “Whistleblowing System” positively influence financial reporting quality by preventing fraud. These findings underscore the critical role of integrated internal governance mechanisms and risk-based audit practices in enhancing the transparency and reliability of financial statements, helping to combat fraud and ensure the integrity of financial reporting.