Professional Documents
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Sri Astuti: Fraudulent financial
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Journal of Economics, Business, and Accountancy Ventura Vol. 18, No. 1, August November 2015, pages 283 290
states that rapid asset growth, increased demand for the fraud. This condition can be reflected in the atti-
cash, external financing, internal and external own- tude of management in a rational justification for the
ership and control of the board of directors are posi- actions of manipulation of financial statements (SAS
tively related to the opportunity to do fraud. But, the no. 99). According to the theory by Cressey (Skousen
change of independent auditors is not an effective et al. 2009), fraud triangle is typically used to identi-
measure for predicting the financial reporting fraud. fy the risk of fraud. Fraud in financial reporting ac-
This study is important for several reasons: 1) cording to Ferdian and Na'im (2006) may involve: (1)
this study used a sample of public company in In- manipulation of accounting records or supporting
donesia to obtain from BAPEPAM sanctions on documents for the presentation of financial state-
fraudulent financial reporting. This has never been ments; (2) omission of information in the financial
done in previous studies, so the results of this study statements; and (3) willful misconduct on the appli-
can be used as input for the regulator (FSA) to make cation of accounting principles.
regulations with respect to the prevention of a com-
pany that has a tendency to commit fraud, 2) This Expectation Gap and Financial Reporting Fraud
study also examined the auditor's responsibility for Manipulation of financial statements is a type of
the actions of management to fraudulent financial fraud in financial reporting. Manipulation can occur
reporting. Results of this study can be used as input because of differences in interests between the con-
for the auditor to perform early detection for acts of stituent financial statements (management) by the
fraud by management. users of financial statements (shareholders). Differ-
ent interests usually call for the conflict of interest in
2. THEORETICAL FRAMEWORK AND HYPO- the agency theory. In principal, the shareholders
THESES want to have a high return on investment, while the
Garner defines fraud as based on the Association of management as an agent has an interest to get great
Certified Fraud Examiners/ACFE (2014) that it is compensation (Jensen & Meckling 1976). But, the
miss-presentation of the truth or concealment of agency has more information than the principal so
material fact to induce another to act to his or her that the agent has the opportunity to commit fraud.
detriment. Consequently, fraud includes any inten- The users of financial statements expect the au-
tional or deliberate act to deprive another of proper- ditors to be able to find and detect fraud in the fi-
ty or money by deception, or other unfair means. nancial reporting. An auditor must be responsible
Generally, fraud is defined as an act of fraud (willful for the acts of fraud that causes a material misstate-
misconduct) is carried by a person or group of ment in the financial statements (SAS 99). Based on
people for their own interests and harms others. SAS 99, there are two errors related to fraud that
Grouping fraud could be based on the behavior of errors arise from fraudulent financial reporting
the actions and the triggering factor. Behaviors that (fraudulent financial reporting) and errors arising
indicate fraud is a lack of proper reporting of assets, from misappropriation of assets.
financial reporting fraud and corruption. Such beha- Misappropriation of assets is often referred to as
vior is not caused by the three most common factors employee fraud, the theft of the assets of the compa-
that include pressure, opportunity, and rationaliza- ny which carried out by company employees. On the
tion. contrary, the fraudulent financial reporting is a be-
There are three conditions that put pressure on havior that is intentional or due to carelessness,
a person or group to commit fraud, the desire to whether by act or omission. This produces financial
demonstrate financial stability, pressure from man- statements of materially misleading. Falsified finan-
agement to fulfill three wishes and excessive pres- cial statement is for the purpose of defrauding inves-
sure to management to meet financial targets set by tors and creditors, by increasing the company's stock
management. Factors opportunities is the opportuni- price, to meet cash flow needs, or hide the compa-
ty for an individual or group of individuals commit ny's losses and its problems (Romney & Stainbert
fraud because of the lack of supervision or internal 2012).
control of the company. Opportunities commit fraud The auditor should also be responsible for plan-
in financial statements due to industry conditions ning and implementing the audit to obtain reasona-
that have a substantial risk for estimated accounting, ble assurance on whether the financial statements
ineffective supervision and complex organizational are free from material misstatement, whether it is
structures (SAS no. 99). caused by error or fraud (SA 316 paragraph 01).
Rationalization is the attitude of a person or However, due to the high complexity of the fraud,
group who is looking for a rational justification for the independent auditor cannot be expected to pro-
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Journal of Economics, Business, and Accountancy Ventura Vol. 18, No. 1, August November 2015, pages 283 290
Table 1
Sample of the Research
Description Total
Companies listed in Indonesia Stock Exchange in 2007-2010 397
The incomplete data 17
Sample number:
Companies violated the law and got sanction by the BAPEPAM (56) 380
Companies that did not get sanctions (324)
company. While the characteristics of the measured leverage, capital turnover and asset composition
external auditor and the auditor tenor is KAP status. significantly affect the tendency of fraudulent finan-
Meanwhile, companies that commit fraud reporting cial reporting.
measured using a dummy variable (1 if doing fraud, Bai et al. (2008) found evidence that Chinese
and 0 otherwise commit frauds). The result is that all companies which carry out fraudulent financial re-
variables showed no significant effect. porting have characteristics of receivables ratio, the
Fraud could be minimized if there is a good ratio of high dosage towards current assets, high cost
oversight mechanism. Monitoring mechanism could to the percentage of revenue, total liabilities were
be done by establishing a system of internal control higher than current revenues and lower debt than
of the company. As stated in the mechanisms of income. Subroto (2012) examined the characteristics
good corporate governance, one of the monitoring of the company and the characteristics of the exter-
mechanisms is to establish an audit committee. The nal auditors to fraudulent financial reporting. Cha-
audit committee serves as a watchdog over the en- racteristics of the companies are measured by ROA,
tire activity of the company. Audit committee mem- the change in total assets, leverage, financial distress
bers must be at least 3 people and one of them (30%) and a life of the company. Yet, the measured charac-
must be independent members from outside the teristics are the external auditor and the auditor te-
company. Expectations of the independent members nure and status of KAP. Meanwhile, companies that
here is that the supervision of the company can be commit fraud reporting measured using a dummy
done as objectively as possible, so that all forms of variable (1 if doing fraud, and 0 otherwise commit
cheating can be detected. The company's obligation frauds). The result is that all variables showed no
to establish an audit committee has been conducted significant effect.
since 2001, by the issuance of BAPEPAM circular George (2009), Carcello and Nagy (2004), Geiger
letter number SE-03/PM/2001. The greater the and Raghunandan (2002) found evidence of fraudu-
numbers of independent audit committees, the low- lent financial reporting tends to occur in the early
er the chances of the company manipulate its finan- years of the audit engagement. This is because the
cial statements. lack of knowledge about the client auditor.
Companies with the complexity of issues can af- Based on the theory mentioned above, and
fect the internal control mechanisms. For example, based on several studies that have been done, then
companies with many subsidiaries, especially when the hypothesis proposed in this study are as follows:
they are outside Indonesia and using foreign curren- H1: Pressure, opportunity, and rationalization affect
cy transactions. This can make another problem in the propensity of companies to do the financial re-
the monitoring mechanism. Companies with high porting fraud.
complexity of the problems provide opportunities H2: The act of fraud financial reporting is positively
for weak controls; this will encourage management related to the auditor's opinion in addition to quali-
to commit fraud against its financial reporting. Res- fied without exception.
pati (2011) examines the determinants of the beha-
vior of managers in conducting fraudulent financial 3. RESEARCH METHOD
statement presentation. The results show that the Population and Sample
ethical climates influence the attitudes and norms to The population in this study is all companies listed
the intention to commit fraud manager financial on the Indonesia Stock Exchange in 2007-2010. The
statement presentation. Soselisa and Mukhlasin method of sample selection was purposive sam-
(2008) state that the composition of current assets, pling. Criteria for selection of sampling are as fol-
the size of the company and the auditor's opinion a lows: (1) public companies publish annual reports;
significant effect on the tendency of accounting (2) Data available complete. This study uses sample
fraud. Gagola (2011) investigated the factors that only public companies listed on the Stock Exchange
affect financial reporting fraud, the result is financial from the year 2007-2010 due to corporate data to
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Journal of Economics, Business, and Accountancy Ventura Vol. 18, No. 1, August November 2015, pages 283 290
presented in Table 2. Based on the results on Table 2, tive free cash flow are not guilty of doing fraud.
the average free cash flow is -0.0124. This indicates And, the average number of subsidiaries is 6 com-
that the company cannot return the profits to share- panies, the number of independent audit committees
holders through debt reduction, increased dividends an average is 2 people, the rate of return on average
or treasury stock. Or in the sense of the company's accounts receivable is 29 days, the number of com-
financial condition is not good. The average compa- panies that earn profits as much as 64%, the number
ny that received sanction from BAPEPAM has poor of companies that did not grow as much as 74% as
financial performance. And, the average number of well as the number of companies that make the turn
subsidiaries is 6 subsidiaries, with a maximum value auditor as much as 59% cannot prove the company
of 24 subsidiaries while the average speed is the re- commit fraud against the financial reporting.
ceivable by 29 days. This indicates that most of the
companies that received sanction from BAPEPAM Test Results of Hypothesis 2
have a rapid rate of return on accounts receivable. Hypothesis 2 was tested by correlation. The second
Average Return on Assets Sample Company is 0144; hypothesis test results are presented in Table 4. The
it indicates that the company's ability to bring in second hypothesis assumes there is a relationship
profits is lower. between the auditor's opinions with companies that
The percentage of the company makes a profit commit fraud. Based on Table 4, the auditor's opi-
as much as 64.1% and companies that have losses nion proved to be positively related to fraud. This is
were 35.9%. This indicates that most of the compa- indicated by a correlation value of 0649 and signifi-
nies are indicted for fraud in financial reporting is a cant.
company that makes a profit in the year of observa- Companies that indicated to fraud tend to get
tion. Companies that obtain an unqualified opinion different opinions with companies that are not guilty
as much as 25.6%, while the companies that obtain of fraud. This is because the auditor is responsible
reasonable opinion without exception with an ex- for identifying; analyzing, and revealed the existence
planatory paragraph as much as 74.4%. This indi- of fraud in the financial statements they audit (SA
cates that most of the companies are indicted for 316 paragraph 01). Therefore, if the company is
fraud in financial reporting is a company that al- guilty of fraud, the auditor will express it in its audit
ready has fairness in its financial statements, but report.
there are some things that need explanation.
Companies that make the turn to auditor is 59% 5. CONCLUSION, IMPLICATION, SUGGES-
and those that do not make the turn auditor is 41%. TION, AND LIMITATIONS
If seen from the percentage, then the company is Fraud usually occurs because of weak internal con-
doing and not replacing the auditor is comparable. trols. In other words, fraud is related to the compa-
Most companies were identified to have committed ny's internal control weaknesses and irregularities
fraud and those which did not experience growth is (non-compliance) of the statute (regulation) which is
74.4%. Meanwhile, the company that grew is only applicable, both of which became the basis of the
25.6%. criteria in determining the auditor's opinion. Auditor
responsible for the fraud, ranging from the planning
Analysis of Hypothesis 1 stage of the audit, the audit, to audit reporting. Thus,
Hypothesis 1 was tested by logistic regression. Re- if fraud is found, it will be disclosed in the indepen-
sults of the test of the first hypothesis are presented dent auditor's report.
in Table 3. The first hypothesis in this study sus- Fraud can be detected not only through the
pected fraud triangle no influence on the financial process of audit by public accountants, but also by
reporting fraud in Indonesia. The first step is to test more comprehensively the role that involves man-
the accuracy of the model with the Hosmer and Le- agement, internal auditors, forensic auditors and
meshow test. Based on Table 3 above, Chi-square other related parties. An auditor is just part of the
value of 8.831 has a significance value of 0.52. The whole chain of corporate financial reporting and
significance value is greater than 0.05, so this re- prevention. The detection of fraud requires the co-
search model deserves to be tested. Meanwhile, the operation of the parties involved in the financial
next step is of all independent variables tested. None reporting. Such as management, board of directors,
of the variables significantly affects the fraud. If standard setters and regulators is a key element in
viewed from the descriptive statistics, the average the implementation of corporate governance. For
free cash flow is negative. that reason, the implementation of good corporate
However, the companies whose value is a nega- governance leads to a positive impact on the reduc-
289
Sri Astuti: Fraudulent financial
tion of fraud in financial reporting companies (Ami- tusan perusahaan melakukan penyajian kem-
ruddin and Sundari 2012). bali (restatement) laporan keuangan, Jurnal
Fairness, Vol. 1, No. 3, pp. 302-330.
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