Internal Motivations Versus External Deterrence: Validating GONE Theory on Financial Statement Fraud in an Emerging Market

Abstract

Financial statement fraud (FSF) remains a persistent concern in emerging markets, where institutional weaknesses and ineffective monitoring increase the risk of financial misreporting. Although prior studies have largely relied on the Fraud Triangle and its extensions, empirical evidence on the applicability of the GONE Theory remains limited, particularly in emerging economies. This study investigates the effects of greed (proxied by managerial ownership), opportunity (proxied by board characteristics), need (proxied by financial target and remuneration), and exposure (proxied by audit characteristics) on FSF (proxied by the likelihood of earnings manipulation measured by the Beneish M-Score). A total of 260 firm-year observations from F&B companies listed on the Indonesia Stock Exchange during the 2019–2023 period were analyzed using the PLS-SEM. The results show that greed, opportunity, and need increase the likelihood of FSF, while exposure has no effect. These findings provide empirical support for the GONE Theory and expand the literature on FSF by highlighting the dominance of internal motivations and organizational conditions, suggesting that managerial incentives, board characteristics, and financial targets are the primary drivers of FSF, as opposed to external preventive mechanisms. This study offers insights for strengthening governance and internal control systems to mitigate fraud risk.