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Fraudulent Financial Reporting and Technological Capability in the Information Technology Sector: A Resource-Based Perspective

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  • Michael K. Fung

    (Hong Kong Polytechnic University)

Abstract

Motivated by the disproportionately high incidence of fraudulent financial reporting in the IT sector where technological capability is a major source of competitive advantage, this study investigates the possible relationship between technological capability and fraud probability in the IT sector. Technological capability is measured by a firm’s technical efficiency relative to peers in transforming cumulative R&D resources into innovative output, which is a source of competitive advantage, according to the resource-based view (RBV) of the firm. Technical efficiency is estimated via data envelopment analysis. A sample of fraud firms taken from Accounting and Auditing Enforcement Releases is matched with control samples of non-fraud firms. Consistent with the RBV, technological capability is found to have a negative and economically significant effect on fraud probability. Moreover, fraud probability is insignificantly associated with the scale efficiency of innovative activities, as investment in R&D resources per se is not a source of sustainable competitive advantage.

Suggested Citation

  • Michael K. Fung, 2019. "Fraudulent Financial Reporting and Technological Capability in the Information Technology Sector: A Resource-Based Perspective," Journal of Business Ethics, Springer, vol. 156(2), pages 577-589, May.
    • Handle: RePEc:kap:jbuset:v:156:y:2019:i:2:d:10.1007_s10551-017-3605-4
    DOI: 10.1007/s10551-017-3605-4
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