Driven by inconsistent financial reporting incidents in the IT sector where technological capability is a major source of competitive advantage, this study investigates the possible relationship between technological capability and the likelihood of fraud in financial statements. Technology capability is measured by the firm's technical competencies compared to its peers in transforming cumulative R&D resources into innovative outputs, which are a source of competitive advantage, according to the company's resource-based view (RBV). Technical competence is estimated through data envelopment analysis. Examples of fraudulent firms taken from the Accounting and Auditing Enforcement Release are matched to a sample of non-fraud firm controls. In line with RBV, technological capabilities are found to have a negative and economically significant effect on the probability of fraud. Moreover, the probability of fraud is insignificant associated with the efficiency of innovative activity scale, as the investment of R&D resources itself is not a source of sustainable competitive advantage.

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