, PhD, Senior Lecture, Accounting Department, Economics and Business Faculty, University of Lampung, Indonesia
, MSc, Lecture, Accounting Department, Economics and Business Faculty, University of Lampung, Indonesia
, PgC MPhil (Hons), Senior Researcher, Accounting Department, Economics and Business Faculty, University of Lampung, Indonesia
, PhD, Assistant Professor, Business Faculty, International Business School, Bulgaria
, PhD, Senior Lecture, Accounting Department, Business Faculty, Indonesian Banking School, Jakarta, Indonesia
The article studies the causes and consequences of manipulating the financial statements of companies, identifies the most influential drivers of fraudulent reporting actions by employees and business owners. This research aimed to examine the effect of fraud indicators in fraud pentagon theory against the detection of fraudulent financial reporting on manufacturing companies. Independent variables in this research were variable pressure proxy by financial stability, external pressure, and financial target, opportunity proxy by nature of the industry, rationalization proxy by total accrual, capability proxy by the change of directors, and arrogance proxy by ownership by management. The dependent variable was the fraudulent financial reporting proxy by fraud score. The sample of this research used 57 manufacturing companies listed on the Indonesia Stock Exchange Effect in 2013-2015. It is found that the result of the determination coefficient test shows an adjusted R2 value of 0.068, it means that the ability of the independent variable in explaining the variants of the dependent variable is still limited, which is 6.8%. The ANOVA test, which shows the possibility of using the regression model to predict the Fraudulent Financial Report, serves as the methodological tool of the study. It is determined that pressure with proxies of financial stability (current), external pressure (Lev), and financial target (ROA), opportunity with the nature of industry (receivable) proxy, and arrogance with managerial ownership (OM) proxy do not affect fraudulent financial reporting. The result of this research showed that rationalization variables proxy by the total accrual ratio and capability proxy by the change of directors had an influence on the fraudulent financial reporting. While the pressure variable proxy by financial stability measured with the current ratio, external pressure measured with leverage ratio, financial target measured with ROA, opportunity variable proxy by nature of industry variable measured with the change in inventory ratio, and arrogance proxy by ownership by management had no influence on financial statement fraud. The results obtained can be useful both for the management of the company and for regulatory authorities in terms of understanding the growth indicators of the financial statement fraud frequency and tools to minimize their impact.
Keywords: fraud, fraud pentagon, fraudulent financial reporting, financial statement fraud, leverage ratio, managerial ownership and manufacturing sector.
JEL Classification: D18, D70, D73, G32, K40.
Cite as: Evana, E., Metalia, M., Mirfazli, E., Georgieva, D.V., Sastrodiharjo, I. (2019). Business Ethics in Providing Financial Statements: The Testing of Fraud Pentagon Theory on the Manufacturing Sector in Indonesia. Business Ethics and Leadership, 3(3), 68-77. http://doi.org/10.21272/bel.3(3).68-77.2019.
- Albrecht, W. S., Albrecht, C.O., Albrecht, C.C. and Zimbelman, Mark F. (2011). Fraud Examination 4th Edition. Cengage.
- Annisya, Mafiana, Lindrianasari, Yuztitya Asmaranti (2016). Fraudulent Detection of Financial Statements Using Diamond Fraud. Faculty of Economics and Business, University of Lampung. Journal of Business and Economics (JBE), Maret 2016, 23(1), 72-89. ISSN: 1412-3126.
- Ardiyani, Susmita dan Utaminingsih, Nanik Sri (2015). Analisis Determinan Financial Statement Melalui Pendekatan Fraud Triangel. Accounting Analysis Journal, 4(1), 1-10.
- Association of Certified Fraud Examiners (2016). Report to the nation on occupational fraud and abuse (2016 global fraud study).
- Beneish, M., (1997). Detecting GAAP Violation: implications for assessing earnings management among firms with extreme financial performance. Journal of Accounting and Public Policy, 16, 271-309.
- Crowe Horwarth (2010). IIA Practice Guide: Fraud and Internal Audit.
- Dechow, P. M., Hutton, A. P., Kim, J. H., and Sloan, R. G. (2012). Detecting Earning Management: A New Approach. Journal of Accounting Reserach, 50(2), 275-334.
- Dechow, P. M., Hutton, A. P., Kim, J. H., and Sloan, R. G. (2012). Consideration of Fraud in a Financial Statement Audit. (Supersedes SAS No. 82.)
- Ghozali, Imam (2013). Aplikasi Analisis Multivariate Dengan Program SPSS 21, Edisi Ketujuh. Semarang: Badan Penerbit Universitas Diponegoro.
- Hanifa, Septia Ismah dan Laksito, Herry (2015). The Influence of the Fraud Indicator on the Financial Statement Fraudulent: Empirical Study of Companies Listed on the Indonesia Stock Exchange (IDX) Year 2008-2013. Journal of Accounting, 04(04), 1-15.
- Jansen, Michael C. and Meckling, William H. (1976). Theory of the Firm: Managerial Behavior, Agency Cost and Ownership Structure. Journal of Financial Economics, 3(4), 305-306.
- Jones, Peter and Daphne Comfort (2018). Sustainable Consumption and the Leading US Retailers. Indonesian Journal of Corporate Social Responsibility and Environmental Management, 1(1), 1-15. Available at: http://ijcsrem.org/index.php/ijcsrem.
- Karima, Naila (2014). Effects of Managerial Ownership, Institutional Ownership, and Foreign Ownership on Corporate Social Responsibility Disclosure. Widya Warta No. 02 Year XXXV III/July 2014. ISSN 0854-1981.
- Manurung, Daniel T. H., dan Hadian, Niki (2013). Detection Fraud of Financial Statement with Fraud Triangel. Proceedings 23rd International Business Research Conference 18-20 November 2013, Marriot Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8.
- Munawir (2014). Analisis Laporan Keuangan [Financial Statement Analysis]. Jogjakarta, Liberty.
- Norbarani, Listiana (2016). Detection of Financial Statement Fraud with Fraud Analysis Triangle Adopted in Sas No.99. Faculty of Economics and Diponegoro University Business Semarang.
- Sihombing, Kennedy Samuel dan Rahardjo, Shiddiq Nur (2014). Diamond Fraud Analysis in Detecting Fraud Financial Statement: Empirical Study of Manufacturing Companies Listed on the Indonesia Stock Exchange (BEI) 2010-2012. Diponegoro Journal of Accounting, 03(02). ISSN (Online): 2337-3806.
- Subramanyam, K.R. dan Wild, John J. (2010). Analisis Laporan Keuangan Buku1Edisi 10. Jakarta: Salemba Empat.
- Pardosi, Rica Widia (2015). Diamond Fraud Analysis in Detecting Financial Statement Fraud in Manufacturing Companies in Indonesia Using the Fraud Score Model (Year 2010-2013). Faculty of Economics and Business. University of Lampung.
- Rini, Viva Yustitia (2012). Analisis Prediksi Potensi Risiko Fraudulent Financial Statement Melalui Fraud Score Model [Analysis of Fraudulent Financial Statement Risk Potential Predictions Through the Fraud Score Model]. Diponegoro Journal of Accounting, 1(1), 1-15.
- Tessa, Chyntia dan Harto, Puji (2016). Fraudulent Financial Reporting: Pengujian Teori Fraud Pentagon Pada Sektor Keuangan Dan Perbankan Di Indonesia. Semarang. Simposium Nasional Akuntansi XIX, Lampung, 2016.
- Tiffani, Laila Dan Marfuah (2015). Deteksi Financial Statement Fraud Dengan Analisis Fraud Triangle Pada Perusahaan Manufaktur Yang Terdaftar di Bursa Efek Indonesia [Detection of Fraud Financial Statement with Fraud Triangle Analysis on Manufacturing Companies Listed on the Indonesia Stock Exchange]. JAAI, 19(2), Desember 2015: 112-125.
- Wolfe, David T. and Hermanson, Dana R. (2004). The Fraud Diamond: Considering the Four Elements of Fraud. CPA Journal, 74(12), 1-5.