A Contextualized Econometric Model for Fraud Risk Assessment in Financial Statement Audits: Evidence from Iraqi Commercial Banks

Abstract

This study aimed to develop and empirically test a contextualized econometric model for assessing fraud risk in financial statement audits among Iraqi commercial banks. This quantitative applied study used balanced panel data from 16 Iraqi commercial banks over the period 2015–2024, producing 160 bank-year observations. Fraud risk was measured as a composite index derived from audit-relevant financial reporting indicators, while the explanatory variables included market orientation, customer satisfaction, operational efficiency, audit quality, and governance quality. Data were obtained from annual financial statements, audit reports, customer satisfaction records, governance disclosures, and regulatory sources. The analysis was conducted using pooled ordinary least squares, random effects, and fixed effects models. The Hausman specification test was applied to select the appropriate panel estimator, and additional diagnostic tests examined multicollinearity, heteroscedasticity, autocorrelation, and cross-sectional dependence. The inferential results showed that the fixed effects model was preferred over the random effects model based on the Hausman test. Governance quality had the strongest negative effect on fraud risk, indicating that stronger board oversight, internal control systems, compliance mechanisms, and audit committee effectiveness significantly reduced fraud-risk exposure. Audit quality also had a significant negative effect, confirming that auditor independence, audit reliability, and adherence to professional standards were associated with lower financial statement fraud risk. Customer satisfaction and market orientation were negatively and significantly related to fraud risk, suggesting that customer accountability, service responsiveness, and reputational discipline may contribute to more transparent reporting behavior. Operational efficiency, measured through the cost-to-income ratio, had a positive and significant effect on fraud risk, indicating that operational inefficiency increased the likelihood of fraud-risk indicators. Robustness estimation using weighted least squares confirmed the stability of these relationships. The study concludes that fraud risk assessment in financial statement audits should be approached through a multidimensional and contextualized econometric framework. In Iraqi commercial banks, fraud risk is shaped not only by accounting indicators but also by governance quality, audit quality, operational efficiency, customer satisfaction, and market orientation. The proposed model provides practical value for auditors, regulators, and bank managers seeking to strengthen fraud detection, improve audit planning, and enhance institutional transparency.