Financial Distress and Financial Statement Fraud: Systematic Literature Review

Gusti Ayu Komang Yanti Yulansari

doi:10.55927/eajmr.v5i7.221

Authors

Gusti Ayu Komang Yanti Yulansari Universitas Pendidikan Ganesha

DOI:

https://doi.org/10.55927/eajmr.v5i7.221

Keywords:

Financial distress, financial statement fraud, fraud triangle

Abstract

This study seeks to examine the association between financial distress and financial statement fraud by employing a Systematic Literature Review (SLR) method. Financial statement fraud involves the deliberate misrepresentation of financial information intended to deceive stakeholders, whereas financial distress reflects a firm’s declining financial performance that may lead to bankruptcy. The study adopts the PRISMA (Preferred Reporting Items for Systematic Reviews and Meta-Analyses) framework to systematically identify, assess, and synthesize relevant literature sourced from the Scopus database. The findings indicate that financial distress has a significant relationship with the increased risk of financial statement fraud. Financial pressure encourages management to engage in manipulative practices such as earnings management, tax avoidance, and misrepresentation of financial information to maintain corporate image and investor confidence. These findings are consistent with the Fraud Triangle Theory, which identifies pressure as one of the primary factors motivating individuals to engage in fraudulent behavior. Furthermore, good corporate governance, effective auditor supervision, ESG practices, and machine learning technology are found to help reduce fraud risk and improve early detection of financial distress and financial reporting irregularities.

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