3rd Economics & Business Research Festival
13 November 2014
FACTORS AFFECTING FINANCIAL STATEMENT FRAUD:
FRAUD TRIANGLE APPROACH
Evta Oktaviani
Golrida Karyawati
Nurruzahman Arsyad
Sampoerna School of Business
ABSTRACT
This study aims to obtain empirical evidence about relationship of fraud triangle with financial
statement fraud. Fraud triangle theory explains that pressure, opportunity, and rationalization
are always present in fraud situations. The variables of fraudrisk factor for pressure are using
proxy financial stability; sales growth (SGROW), asset growth (AGROW), and cash flow to
earnings growth (NICFOTA), financial security that proxy by account receivable turnover
(SALAR) and asset turnover (SALTA), external pressure that proxy by leverage (LEV), financial
targets proxy by return on asset (ROA).
Variables for opportunity used are ineffective monitoring proxy by independent board members
(BOUTP), board members on audit committee over board size (AUDCSIZE), and independent
audit committee (IND). Variables for rationalization are using managements’ control proxy
which represent by auditor opinion (AUDREPORT). Financial statement fraud is representing
by a proxy of earning management. Earnings management as measured by discretionary
accruals estimated using the modified Jones model (1991). The population of this research is
133 manufacturing companies listed on Indonesia Stock Exchange (IDX) in 2011 and 2012.
Data analysis was performed through classical assumption and hypothesis testing using linear
regression.
The result of this research indicates that all variables which represent opportunity, pressure,
and rationalizations have significant association with financial statement fraud. Association of
asset growth, sales growth, return on asset, board members on audit committee over board
size, and independent audit committee are supported previous research. Moreover other factor
asset turnover, receivable turnover, operating cash flow indicator, leverage, independent
board, and auditor opinion contradicts previous study supported by constructive reason of
practice.
Keywords: Fraudulent financial statement, fraud triangle, fraud risk factor, financial stability,
financial security, external pressure, financial target, ineffective monitoring, earning
management, discretionary accruals.
INTRODUCTION
Background
Fraud cases caused worse impact to economy world widely. One of the biggest case is
the case involving world's giant energy company, Enron in 2002. Fraud committed by the
company resulted in losses $ 50 billion, investor suffer loss $ 32 billion and thousands of
employees of Enron losed their pension fund about $ 1 billion.
Currently number of fraud cases has increase worldwide. KPMG's 2012 survey found
that $373 million was stolen over the past two years and the average value of fraud loss is more
than $3 million (KPMG Forensic, 2012).
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1939
3rd Economics & Business Research Festival
13 November 2014
Extensive studies conducted by Association of Certified Fraud Examiner (ACFE shows
that Indonesia position in terms of number fraud cases occurs compare to other Southeast Asia
country as shown on figure 1.1
Association of Certified Fraud Examiner (ACFE,2012) classified occupational fraud
into corruption, asset misappropriation, and fraudulent statement. From those typesit was
founded that financial statement fraud is the most costly form of occupational fraud which cause
median loss in 2012 as much as $1 million compares to corruption caused by asset
misappropriation which are $250,000, and loss caused by corruption $120,000 as drawn by
figure 1.2
Figure 1.2 shows that financial statement fraud has cause a lot of losses. Financial
statement fraud has become the highest one compare to other types. Fraud in financial reporting
become main concern of many parties because financial report is important instrument
especially for external parties in analysing the performance of company. If financial report is
manipulated, it will lead users of financial statement take wrong decision on their investment.
This financial statement fraud is very interesting and worth studying.
Financial losses caused by financial statement fraud bring professionals taking
initiative in analyzing motivation of perpetrators to engage in fraud acts. One of
thoseresearchers is Dr. Donald Cressey in 1953.His finding about motivation of committing
fraud has been recognized widely anddeveloped into a theory called as Fraud Triangle Theory.
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1940
3rd Economics & Business Research Festival
13 November 2014
Cressey’s theory has been adopted by government of United States in designing
regulation to increase the effectiveness of auditor in detecting fraud, which in SAS 99 stated
as fraud risk factor (Skousen, 2009). According to Cressey there are three factors must be
present for fraud to occur which are pressure, opportunity, and rationalization.
Pressure occurs when employee cannot achieve or solve the problem what they
supposed to do. Opportunity referred to how person able to do fraud. It’s matter of ways of
committing fraud. Lastly, Rationalization is referring how fraudster rationalizes his action
before his engage in fraud.
Fraud triangle theory introduced has widely used in detecting motivation of perpetrator
engage in financial statement fraud. Researchers who used this fraud triangle theory in
theirresearch areSkousen and Wright in 2006 and 2009. In Indonesia, similar works has been
done by EmaKurniawati (2012) where she used restatement as proxy for financial statement
fraud with used sixths independent variables derived from fraud triangle.
Research Problem
Motivation of fraud represent by Cressey’s fraud triangle theory has used by many
researcher to detect the likelihood of financial statement fraud. Representative proxy developed
from each component of fraud triangle expected to investigate and reduce financial statement
fraud practices. This research will answer this question: Does Pressure, Opportunity, and
Rationalization affect the tendency of financial statement fraud behavior in
LITERATURE REVIEW
Financial Statement Fraud
Beasley et al (1999) argued that financial statement fraud is more likely occurs in
companies which experiencing financial difficulties rather than normal companies. Beasley
divide financial statement fraud into two types. First, is the intention of management toisueor
to publish materially misleading financial statement .The second, is the occurrence of
misappropriations asset by top management like chairperson, vice chairperson, chief executive
officer, president, chief financial officer and treasurer.
Financial statement fraud mostly involveoverstatement company’srevenues and assets
(Beasley et al, 1999). Overstating revenuescan be done by recording fictitious sales and
relatedtransactions. Another practice of financial statement fraud is overstating assets by
overstating inventory, property, plant, equipment, and other tangible assets while actually those
assets did not exist.
Earning Management
Earning management is considered as “window dressing “action undertaken by
manager to increase firm’s reported accounting earnings which has no impact on company’s
real cash flow and economic earning ( Dutta and Gigler , 2002). Earning management take
place when there is difference between reported earning with true earnings, while agent
dishonestly communicate the information for their personal gain.
Schipper (1989) in Nelson et al (2002) stated that earning management ispart of fraud
in which manager intentionally intervene financial reporting process to produce private gain”.
Rosenzweig and Fischer (1994) defined earning management as manager action that is
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1941
3rd Economics & Business Research Festival
13 November 2014
intended to increase or decrease current reported earnings without generating a corresponding
increase or decrease in long term economic profitability.
Roubi and Richardson (1998) in Ahmad et al (2008) mentioned that “fraudulent
financial reporting relates the fraudulent acts with earning management activities.Earnings
management can be divided into opportunistic earnings management and efficient earnings
management. Siregar and Challen (2012) mentioned that “opportunistic earnings management
will lower the quality of earnings reported by management. Investors will not appreciate lower
quality of earnings announced”. Efficient earnings management according to Siregar et al.,
(2008) is whenthe earnings management focuss onenhancing informational content of earnings
and promote communication between managers, shareholders and the public.
Opportunistic earning management action is considered as fraud, such as when
management deliberately commit window dressing, misstating, and manipulating company’s
assets which affect financial statement. This action false the information and finnalyharm
stakeholders. Zhao and Chen (2008) stated that earnings management is proxy for financial
reporting fraud.
Fraud Triangle
Motivations in committing fraud are basically vary among perpetrators. Currently
Fraud Triangle Theory is mostly used in detecting motivation of people engage in fraud. This
theory is introduced by Dr. Donald R. Cressey, a criminologist who made research focus on
embezzlement behavior. Cressey (1953) found that there are three elements that drive people
in doing fraud which are pressure, opportunity, and rationalization as shown on figure 2.3.
Skousen and Wright (2008) found that pressure has significant impact on financial
statement fraud. Sales growth and asset growth (Bell et al., 1991), operating cash flow
(Albretch, 2002), account receivable turnover and total asset turnover (Albretch, 2002),
leverage (Defond and Jiambalvo, 1991), and Return on Asset (Summers and Sweeney, 1998)
are represent pressure.
Fraud relateto opportunity components can be measured through independent board
members (Beasley at al., 2000 &Dechow et al., 1996) ,composition of board members on audit
committee (beasley et a,,2000), and independent audit committee (abbot and parker,2001.
Lister (2007) suggested that rationalization is the hardest fraud condition to understand
and determine. Skousen et al. (2009) use auditor change and auditor opinion to measure
financial statement fraud
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1942
3rd Economics & Business Research Festival
13 November 2014
Previous Study
Prior research concern in detecting financial statement fraud using fraud triangle has
been studied by many researchers. Research conducted by Skousen and Wright (2006) with
title “Contemporaneous Risk Factors and the Prediction of Financial Statement fraud” identifies
factors related to fraud. They examined set of factors which derived from fraud triangle
components and it’s linked to incident of financial statement fraud.
This research finds that the increasing in independent audit committee resulted in
financial statement fraud reducing. Further, is that holding more than 5% outstanding shares
increasing fraud occurrence. Another finding, is that the existing of audit committee will
increase the likelihood of fraud occurence. The decreasing amount of insider ownership
increase fraud tendency, while fraud significantly higher when both positions CEO and
chairman of board occupied by one person rather than the two different persons.
Further research done by Skousen, Smith, and Wright (2009) which examine
effectiveness of Cressey’s (1953) fraud risk factors adopted in SAS No. 99. This research aim
at detecting financial statement fraud. Skousen, Smith, and Wright (2009) developed proxies
to measure pressure, opportunity, and rationalization by using publicly available information
in financial report. This research found that pressure proxies and proxies for opportunity are
significant in detecting financial statement fraud.
Research conducted by Spathis (2002) examined published data to detect factors
associated with false financial statements (FFS) at manufacturing companies in Greece by using
ten financial variables; consist of inventories to sales ratio, the ratio of total debt to total assets,
the working capital to total assets ratio, the net profit to total assets ratio, and financial distress
(Z-score). Finding of his research shows that there is association between indicator use and
false financial statement, they are; high inventories with respect to sales, high debt to total
assets, low net profit to total assets, low working capital to total assets and low Z scores are
more likely to falsify financial statements.
Specifically Beasley (1996) researched relation between board of director composition
and financial statement fraud. Results in this study showthat the presence of audit committee is
not significantly affect likelihood financial statement fraud. While number of outside
directorship in other firms held by outside directorsdecreases, the likelihood financial statement
also decreases.
Related research continued by Spathis, Doumpos, and Zo-pounidis (2000) by detecting
associated with falsified financial statements using ten financial ratios. This study highlight
important financial ratios that can be helpful towards identification of falsifying financial
statement such as total debt to total assets ratio, inventories to sales ratio, net profit to sales ratio
and sales to total assets ratio.
Hypothesis
Pressure and Financial Statement Fraud
Previous research use financial stability, external pressure and financial targets to
define existence of pressure.
Rapid Asset Growth
Rapid growth in company’s assets associatewith the likelihood of financial statement
fraud (Beasley et al. 2000). So, that the hypothesis can be drawn as follows:
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1943
3rd Economics & Business Research Festival
13 November 2014
H1: Asset Growth is positively related to likelihood financial statement fraud
Sales Growth
Company’s performance affects manager action in doing fraud. In condition where
companies experience slow performance shown by decrement in sales, managers will get
propensity to commit fraud by falsifying sales amount to make it as if grow or at least maintain
consistent growth. This relate with previous research conducted by summers and Sweeney
(1998) which stated that sales growth has high propensity of misleading.
H2: Sales growth is negatively related to financial statement fraud
Cash flow indicator ratios
Previous research conducted by Albrecht (cited in Skousen, 2006) argued
thatcompany’s financial stability become problem when management is not able to generate
positive cash flow from operation repeatedly. Managementinability to generate positive
operating cash flow will be align with earning growth. Negative operating cash flow also
reflects lower number of earning growth. This condition encourage management engaged in
fraud by manipulating cash flow statement,especially in operating cash flow to make it positive.
H3: Cash flow indicator is negatively associate with the likelihood of financial statement fraud
Receivable Turnover Ratio
Increase in account receivable will raise the likelihood of company to inflate the
revenue (Beneish, 1997). Sales dominated by account receivables rather than by cash increase
the possibility of management to manipulate and falsify the numbers of sales occurred in that
period.
Lower turnover ratio indicates that company is not able to collect its receivables
frequently and efficient. This condition encourages management to engage in fraud by lowering
account receivable and increasing number of cash sales. Increasing accounts receivable
turnover ratio, will reduce the likelihood financial statement fraud. Therefore negative
association between sales to account receivable create the probability of fraud. The hypothesis
derived is as follows:
H4: Receivable turnover ratio is negatively relate with the likelihood of financial statement
fraud
Asset turnover ratio
Sales to total assets is a measurement of capital turnover represent which how well
sales generating company’s asset. Sales to total asset are is to give information about
management’s ability in dealing with business competitiveness. Management of fraud firm has
different ability with management of non-fraud firm (Persons, 1996). Inability of management
to win the competitiveness in the business will encourage them to performed fraudulent
financial reporting.
Fraud firm has lower sales to assets compare to non-fraud firms.
Hypothesis expected is as follows:
H5: sales to total assets is negatively relatewith likelihood financial statement fraud
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1944
3rd Economics & Business Research Festival
13 November 2014
Leverage
Leverage is part of pressure factor that encourage management to engage in financial
statement fraud. The condition in which company facing lower performance will affect the
company ability to pay the debt and meets debt covenant. If firms cannot meet debt covenant
means that there will be reconstructing cost. To avoid this cost company have to have incentive
to overstate earnings. Manager will maintain variables related to covenant remain good,
because it will be evaluated by creditor and for sure this will affect the future opportunity to
borrow more money.
H6: Leverage is positively relate with likelihood financial statement fraud
Return on Asset
ROA also become the main indicator in determining bonus and salary increment. This
could motivate management to perform fraud when they cannot achieve the target. Higher in
return on asset values will increase the likelihood of fraud occuring. There will be difference
between ROA in fraud and no-fraud Company (Summers and Sweeney, 1998). That’s why
ROA is used to represent financial target that can lead to fraud in financial statement. The
hypothesis derived is as follows:
H7: Return on assets is positively associated to likelihood financial statement fraud
Opportunity and Financial Statement Fraud
Opportunity factor will be existed in the absent of effectivemonitoring within the firms.
Opportunity factor represented by three variables; independent board, audit committee size,
and independent audit committee.
Independent board members
Existence of board directors within an organization has important role in monitoring
top management action in running the company. This monitoring is including control over
violation action performed by management to avoid financial statement fraud.
Dunn (cited in Skousen et al. 2006) argued that fraud firms have fewer outside
members on their board of directors compare to non-fraud firms. The higher outside member
in directorship, the lower incident of fraud. The following hypothesis is as follows:
H8: Independent board members is negatively relate with the likelihoodof financial statement
fraud
Audit committee size
Lack of audit committee system may cause ineffective monitoring. Beasley et al. (2000)
stated that the larger the audit committee, the lower the incident of fraud occurred. Composition
of audit committee becomes importance as many fraud cases appear to the surface recently.
Audit committee has function in helping board of commissioner to increase the quality
of financial report, control any violation, increase internal or external audit function, and
identify certain part which need attention of supervisory or board of commissionaire. Those
functions will make the audit committee size play important role in affecting occurrence of
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1945
3rd Economics & Business Research Festival
13 November 2014
fraud within the company. The larger audit committee size, the lower incident fraud.
Hypothesisderived as follows:
H9: Audit Committee size is negatively relate with thelikelihood offinancial statement fraud
Independent Audit committee
Independent audit committee has relationship with incident of fraud (Abbot et al.,
2001). The existing of independent audit committee is expected to performed effective
monitoring to-wards company without involving personal interest inside. Independent audit
committee should be people who have no role or conflict of interest within the company.
Robinson (cited in Skousen et al., 2006) stated that independent audit committee sees as
member who is not current employee of the firm, management, professional advisor, director,
and people who have no significant transaction with firm, former officer or employee of firm
and related party. Independent members will perform better monitoring towards management.
Increasing in number of independent audit committee associated with lower incident financial
statement fraud.
H10: Independent Audit Committee is negatively related to likelihood financial statement fraud
2.5.3. Rationalization and Financial Statement Fraud
Previous researchs mentioned that rationalization is difficult to measure. Auditor
opinion is usually used to be a proxy to represent rationalization factor because fraud action
done by perpetrators in rationalizing their action could be detected by auditor.Auditor opinion
towards financial report can be used to draw the conclusion whether in such company there is
propensity to fraud or otherwise.
H11: auditor opinion is negatively related to likelihood financial statement fraud
METHOD
Sample and Data
This research is using secondary data obtained from consolidated financial statements
of manufacturing companies listed in Indonesia Stock Exchange (IDX) for the years of 200112012. The chosing of manufacturing companies as samples is due to the characteristic of the
industry that encourage higher earnings management practices compare to other industry.
Manufacturing companies in Indonesia consist of several business sectors; basic industry and
chemicals, miscellaneous industry, and consumer goods industry.
Samples are taken from the year of 2011 and 2012 with consideration that the effect
caused by fraud action cannot be directly detected by using only one year of observation. The
fraud impact can be seen at least in two years observation. This is consistent with the argument
of Beasley, et al (1999) that “Most of fraud overlapped at least two fiscal periods, frequently
involving both quarterly and annual financial statements. The average fraud period extended
over 23.7 months”.
This research is constructed using panel data period of 2011 to 2012.Baltagi (2001)
argued that “Panel data provide more informative data, more variability, less collinearity among
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1946
3rd Economics & Business Research Festival
13 November 2014
the variables, more degrees of freedom and more efficiency”. Another advantages using panel
data is able to dealing with heterogeneity, control unobservable heterogeneity of each firm
effect, and provide more information that will minimize bias.
The Samples were selected using purposive sampling method which allows authors to
obtain specific information. Sampling Criteria in data selection are as follows:
1. Manufacturing companies listed on the Stock Exchange in 2011-2012.
2. The company is not delisting along the period of 2011-2012.
3. Company publishes independent auditor's report and financial statements ended on
December 31 with Indonesia’s currency.
4. Company has a complete data needed.
The sample screening is shown on table 3.1.Data collected are financial statements
report and independent of auditors' report of manufacturing companies from Reuters
Datastream, Fact book IDX, IDX website, company’s annual reports taken from Indonesian
Stock Exchange website, and company’s website for the period of 2011 and 2012.
Table 3.1
Sample
Manufacturing sector company
138
Delisted Company from 2011 to 2012
2
Company incomplete data
3
Total companies
133
Total Sample (133 * 2 years)
266
Those data is processed using E-views and SPSS software. Along the regression
process, from 266 number of observation, it changes into 208 observations because the authors
exclude the outlier exist in regression.
Research Model
This study use model similar as Skousen and Wright (2006) did in their research. The
main model will analyze the effect of variables derived from pressure, opportunity, and
rationalization towards financial statement fraud which proxied by earning management using
discretionary accruals. The model is as follows:
DACC= α+ β1 AGROW+β2 SGROW+β3 SALAR+β4 SALTA+β5 NICFOTA+β6 ROA+β7
LEV+β8 BOUTP+β9 AUDREPORT+β10 AUDCSIZE+ β11 IND+β12 FSIZE+ ε
Notes:
DACC
= Absolute value of discretionary accruals
AGROW
= % change in assets for the two years prior
SGROW
= Growth in sales
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1947
3rd Economics & Business Research Festival
13 November 2014
SALAR
= Financial security (Sales/accounts receivables)
SALTA = Financial security ratio (sales / total assets)
NICFOTA
= Earnings growth
ROA
= Financial target
LEV
= External pressure ratio (total debt / total assets)
BOUTP
= % Independent board members
AUDREPORT= A dummy variable, 1= an unqualified opinion, 0= an unqualified opinion with
additional language
AUDCSIZE
= Number of board members who are on the audit committee divided by the
board size
IND
= % independent audit committee
FSIZE
= Firm Size
Dependent Variables
Dependent variable of this research is financial statement fraud. Earnings management
is used to measure financial statement fraud. Earnings management will be measured by
discretionary accruals (DACC) referring to Modified Jones Model (1991) . Thee model used is
as follows:
DACC it = TACC it – NDACC it
Note:
DACC it
= Discretionary accruals of firm i in year t
TACC it
= Total accruals firm i in year t
NDACC it
= Non-discretionary accruals firm i in year t
Independent Variable
This study uses eleven independent variables derived from pressure, opportunity and
rationalization, based on previous research conducted by several researches such as Skousen
and Wright (2006), Beasley (1996), Dechow et al (2010), Summers and Sweeney (1998),
Persons (1995), Beneish (1997), DeAngelo et al (1994), and Skousen et al (2009).
Variable used to measure existence of pressure in company’s management are consist
of sales growth, rapid asset growth, cash flow indicator ratio, receivable turnover ratio, asset
turnover, leverage, and return on asset.Opportunity variable consist of; independent board
members, audit committee size, independent audit committee. Rationalization will be proxied
by auditor opinion.
Control Variable
This research use firm size as control variable to neutralize effect and avoid bias in
research model. Firm Size is calculated using Logarithm natural (Ln) of Total Assets
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1948
3rd Economics & Business Research Festival
13 November 2014
RESULT and ANALYSIS
Descriptive Statistic
Table 4.1
Descriptive Statistics
Variables
Mean
Median
Maximum
Minimum
Std.
Dev.
n
DACC
AGROW
SGROW
SALAR
SALTA
NICFOTA
ROA
LEV
BOUTP
AUDREPORT
AUDCSIZE
IND
FSIZE
-0.002
0.129
-0.033
7.568
1.216
0.019
8.415
0.271
0.164
0.962
0.125
0.331
21.074
2.43E-17
0.114
-0.023
6.634
1.083
0.024
6.725
0.251
0.167
1
0.118
0.333
20.853
0.179
0.601
0.434
22.989
5.837
0.235
37.47
1.581
0.4
1
0.333
0.5
25.918
-0.357
-0.775
-0.907
2.347
0.060
-1.171
-13.59
0
0
0
0.043
0.2
18.295
0.066
0.145
0.158
4.137
0.656
0.117
8.421
0.219
0.079
0.193
0.048
0.050
1.521
208
208
208
208
208
208
208
208
208
208
208
208
208
Table 4.1 shows the result of descriptive statistic for each variable. Descriptive statistic
for discretionary accruals shows quite larger range from maximum to minimum values. Asset
growth (AGROW) which represents growth in asset has quite large range between minimum
and its maximum values. Minimum values shows values -0.775 which dominated by sub
industries to metal and allied products. While maximum values 0.601 its hold by sub industries
textile and garment. Mean values of asset growth compares to its standard deviation give 0.1875
percentage point which indicates that only 18% of manufacturing company experience growth
in asset.
Earnings Management Practices
Table 4.3 shows that mean of discretionary accruals (DACC) equals to 0. It indicates
the lower tendency of earning management practices .
Table 4.3
One Sample Test
Test Value = 0
Dacc
t
df
.000
260
Sig.
(2-tailed)
1.000
Mean
Difference
.0000000
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1949
3rd Economics & Business Research Festival
13 November 2014
Regression Model Result
The result of regression model testing shows that regression model is robust in
analysing the relationship between all independent and dependent variables as shown on tabel
4.4. The twelve independent variables together explain the variationof financial statement fraud
proxied by DACC.
Table 4.4
Goodness of Fit Test
R-squared
0.7833
Adjusted R-squared
0.4784
S.E. of regression
0.0479
F Test
2.5692
Prob (F statistic)
0,000
The value of Adjusted R-squared for the model on table 4.4 shows that all independent
variables explain 47.84% of Financial statement fraud. The probability of F-statistics shows
value 0.0000, while this research use significant value of α = 5%.
Table 4.6 is shows the result of coefficient for individual parameter significance test .
The model of regression derived from table 4.6 is as follows:
Table 4.6 shows that all independent variables of this research and one control variable
which is firm size (FSIZE) are significantly influence financial statement fraud proxied by
discretionary accruals (DACC). All those variables have probability of t-statistic even smaller
than 1% significance level.
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1950
3rd Economics & Business Research Festival
13 November 2014
Table 4.9 shows that research model without including firm size as control variable.
All elevenindependent variables remains significant in influencing financial statement fraud.
Value in prob. F-stat indicates that overall model represent better model in explaining
relationship between independent and dependent variables. Value of adjusted R- square means
that 47 % of this model is able to explain the relationship independent variable towards
likelihood financial statement fraud.
Table 4.10 shows regression model by inclusion firm size as a control variables in the
model. The model shown on table 4.10 explains that inclusion of control variable does not affect
explanatory variable significantly. The sign of independent variable correlation remains the
same as previous results. Differences exist in changing value of coefficient of each variable and
different sign of Constanta coefficient from positive into negative sign. R square of model
slightly increase while the F-test slightly decrease compare to previous model without including
control variable.
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1951
3rd Economics & Business Research Festival
13 November 2014
The coefficient regression shown on table 4.10 all independent variables influence
significantly earnings management practices (DACC). Eight independent variables which are
Asset Growth (AGROW), Receivable Turnover Ratio (SALAR), Asset Turnover ratio
(SALTA), Cash Flow Indicator Ratio (NICFOTA), Return on Asset (ROA), Independent Board
Members (BOUTP), Auditor Opinion (AUDREPORT), and Firm Size (FSIZE), influence
positively DACC while 4 Independent variables negatively influence DACC which are Sales
Growth( SGROW), Leverage (LEV), Audit Committee Size (AUDCSIZE), Independent Audit
Committee (IND).
Discussion
This study found that the higher asset turnover ratio (SALTA), the higher the tendency
of financial statement fraud occurred. Higher percentage in total asset ratio indicates that
company generate more sales, but this sales could come from related party’s transaction;
affiliates, parent companies, and subsidiaries which turns out that the amount are made looking
good. This finding is supported by Chen and Elder (cited in Zack, G.M, 2013)who explain that
“sudden or ongoing increasing in this ratio could mean that company is generating revenues
from transactions with affiliated entities and this revenue could be intentionally made”.
This research also found that as outside members of board (BOUTP) size increases,
the financial statement fraud practices also increases. It contrary with hypothesis expected
which is thefewer the number of outside members on board of directors the more the financial
statement fraud occurred.
The reason beyond the positive association between percentages of outside members
to occurrence of fraud is possibly caused by facts that outside members usually hold other
directorship position in other firms. When outside board members hold more position in the
company, it will reduce her or his monitoring responsibilities for the other companies (Beasley,
1996). This condition might also affected by commissionaire independent phenomena as an
actor to collude with perpetrator and do not stop the unlawful acts. In addition, Independent
board is not always an independent person. In fact, usually majority board of directors will
appoint a specific person to fill the position of an independent board that is consistent with the
objectives of board members of the company.
Empirical result of the study regarding the firm size (FSIZE) found the tendency that
financial statement fraud practices are smaller in larger firm compare to small firm size. The
other fact is that the smaller the firm the bigger the propensity of fraud occurred.This result is
consistent with Povel, Singh, and Winton (2007) and Wang (2008) finding which argued that
growth firms are more likely to commit fraud because firms that better access to external capital
market are more likely to engage in fraud because other motivation of doing fraud are also to
temporary inflate security prices and lower cost of external finance
CONCLUSION
This study investigate the effect of fraud motivation through Cressey’s fraud triangle
or fraud risk factor which are pressure, opportunity, and rationalization. Analysis results shows
that Pressure, Opportunity, and Rationalization affect the tendency of financial statement fraud
behavior at manufacturing companies in Indonesia. Pressure and opportunity is the most
prevalent motivation in manufacturing companies in Indonesia to commit financial statement
fraud.
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1952
3rd Economics & Business Research Festival
13 November 2014
The effect of three pressure variables; asset growth, sales growth, Return on Asset, and
two opportunity variables which are audit committee size and percentage of audit committee
members who are independent of company significantly predict financial statement fraud.
Those variables are consistent with hypothesis and previous study conducted by Skousen and
Wright (2006), Francis and Krishnan (1999), Beasley (1996), Beasley (2000), Dechow et al.
(1996), Beneish (997).
Variables such as accounts receivable turnover, asset turnover, cash flow to earnings
growth, leverage, percentage board members who are outside members, auditor opinion, and
firm size also significant in explaining the influence of fraud motivation with the tendency of
financial statement fraud practices.
The result of thisresearchsuggests companies to focus on specific factors which
vulnerable of fraud, especially tighten company regulation to reduce opportunity motivation in
committing fraud, for example increase monitoring on operational activities by implementing
random and material checking on specific account.
Government through OtoritasJasaKeuangan (OJK)need to take active role in
formulating policies, regulations, and standards in an effort to narrow the opportunities of fraud.
For example OJK could reduce the pressure and opportunity motivation of company in doing
fraud by requires listed companies on the securities exchanges to have Whistleblowing Policy
(WBP) regarding to regulation No. X.K. 6 attachment decision of OJK Chairman OJK: Kep‐
431/BL/2012 on August 1, 2012 about submission annual report of the issuer or listed company.
OJK issupposed to tighten this regulation to improve the quality of information disclosure in
annual report of listed companies as source of important information for shareholders and public
in making investment decisions.
Further study is suggested to use other method to detect financial statement fraud as
was done by many researchers, for example by classifying fraud and non-fraud firm to get a
better picture of the relationship between fraud motivation and financial statement fraud
practices or other methods.
REFERENCE
Albrecht, C., Conan, A. (2008). The nature of Financial Statement Fraud. Internal Auditing, 23
(4), pg. 22
Abbott, L. and S. Parker. 2001. Audit committees and auditor selection. Journal of
Accountancy, 191 (6), pg. 95-96
Akdere, M. Azeyedo, R.E. (2006). Agency Theory Implications for Efficient Contracts in
Organization Development. Organization Development Journal, 24(2), pg.43
Association of Certified Fraud Examiners. (2010). Report to the Nations on Occupational
Fraud
and
Abuse.
Retrieved
March
18,
2014
from
http://www.acfe.com/uploadedFiles/ACFE_Website/Content/documents/rttn2010.pdf
Baeten, X., Balkin, D., Berghe, L.V. (2011). Beyond Agency Theory: A Three-Paradigm
approach to Executive Compensation. The IUP Journal of Corporate Governance, X
(4).
Beneish, M. (1999). Incentive and penalties related to earnings over statements that violate
GAAP. The Accounting Review, 74(4), pg. 425-457.
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1953
3rd Economics & Business Research Festival
13 November 2014
Beneish, M. (1997).Detecting GAAP violation: Implications for assessing earnings
management among firms with extreme financial performance. Journal of Accounting
and Public Policy, 16(3), 271–309.
Beasley,M.,Carcello,J.,Hermanson,D.,&Lapides,P.D.(2000).Fraudulent financial reporting:
Consideration of industry traits and corporate governance mechanisms. Accounting
Horizons, 14(4), 441–454.
Beasley, M., Carcello,J.,&Hermanson,D.(1999).COSO’s new fraud study: What it means for
CPAs. Journal of Accountancy, 187(5), 12–14.
Beasley, M.S.(1996). An Empirical Analysis of the Relation between the Board of Director
Composition and Financial Statement Fraud. The Accounting Review, 71 (4), pp. 443
– 465.
Baltagi, Badi H. 2001. Econometric Analysis of Panel Data. Wiley, John & Sons
Chidambaran, N.K., Kedia, S., Prabhala, N.R. (2011). CEO-Director Connections and
Corporate Fraud. Working paper, Fordham University, pg.1-52
DeAngelo,H.,DeAngelo,L.,&Skinner,D.(1994). Accounting choice in troubled companies.
Journal of Accounting and Economics, 17(1), 113–143.
Dechow,P., Sloan,R., Sweeney,A.(1996). Causes and consequences of earnings manipulation:
An analysis of firms subject to enforcement actions by the SEC. Contemporary
Accounting Research, 13(1), pg.1–36.
DeFond,M., Jiambalvo,J.(1991).Incidence and circumstances of accounting errors. The
Accounting Review, 66(3), pg. 643–655.
Doumpos,M., Spathis,C.T.,Zopounidis, C. (2002). Detecting falsified financial statements: a
comparative study using multicriteria analysis and multivariate statistical techniques.
The European Accounting Review,11(3), pg. 509–535
Dutta,S., Gigler,F.(2002).The Effect of Earning Forecasts on Earnings Management. Journal
of Accounting Research, 40(3).
Dye, R.A .(1988). Earnings Management in an Overlapping Generations Model. Journal of
Accounting Research, 26 (2), pg. 195-235.
Fama, E. F. 1980. Agency problem and the theory of the firm. Journal of Political Economy,
vol. 88, pg. 288-308
Fama, E. F., Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and
Economics, pg. 301 - 325.
Feng-Li Lin. (2011). Is Earnings Management Opportunistic or Beneficial in Taiwan?
Application of Panel Smooth Transition Regression Model. International Journal of
Economics and Finance, 3(1)
Francis, J.,&Krishnan,J.(1999).Accounting accruals and auditor reporting conservatism.
Contemporary Accounting Research, 16(2), pg. 135–165.
Fischer, P.E &Stocken, P.C. (2004). Effect of Investor Speculation on Earnings Management.
Journal of Accounting Research, 42 (5), pg.843-870
Gramling, A., Johnstone, K., Rittenberg, L.E.(2012). Auditing: A Business Risk Approach, 8th
Edition. South-Western: Cengange learning.
Kurniawati,E. (2012). Analisisfaktor-faktor yang Mempengaruhi Financial Statement Fraud
DalamPerspektif Fraud Triangle. S1 Thesis, FakultasEkonomikadanBisnis:
UniversitasDiponegoroLister, L.M. (2007). A practical approach to fraud risk. Internal
Auditor, 64 (6), pg.61
Macey, J. (2007). Getting the word out about fraud: A theoretical Analysis of Whistleblowing
and Insider Trading. Michigan Law Review, 105(8), pg. 1899-1940.
Murdock, H. (2008). “The three dimensions of fraud”. Internal Auditor, pp.1-14.
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1954
3rd Economics & Business Research Festival
13 November 2014
Nelson, M.W., Elliot.J.A., &Tarpley, R.L. (2002).Evidence from Auditor about Managers’ and
Auditors’ Earning Management Decisions. The Accounting Review, 77, pg. 175-202
Norsiah, A., Mohammad,J., Saleh, N.M., (2008). Fraudulent Financial Reporting And
Companies’ Characteristics: Evidence From Tax Audit. Working papers series
retrieved on June 15, 2014 from http://ssrn.com/abstract=1158167
Omar, N., Koya R.K., Sanusi, Z.M., and Shafie, N.A. (2014). Financial Statement Fraud: A
Case Examination Using Beneish Model and Ratio Analysis. International Journal of
Trade, Economics and Finance, 5(2).
Persons, O. (1995). Using Financial Statement Data to Identify Factors Associated with
Fraudulent Financial Reporting. Journal of Applied Business Research, 11(3). Pg.3846
Povel, P., Singh, R., & Winton. A. (2007). Booms, Busts, and Fraud. Review of Financial
Studies, 20, 1219-1254.
Rosenzweig, K. and Fischer, M. (1994). “Is Managing Earnings Ethically
Acceptable?”.Management Accounting, pg. 31-34.
Siregar,S.V., Challen, A.E. (2012). Audit Quality on Earnings Management and Firm Value.
Finance and Banking Journal, 14(1).
Skousen, C.,&Wright,C.(2008).Contemporaneous risk factors and the prediction of financial
statement fraud. Journal of Forensic Accounting, IX, 37–62.
Skousen, C.J., Smith, K.R., and Wright, C.J. (2009). Detecting and predicting financial
statement fraud: the effectiveness of the fraud triangle and SAS No. 99. Advances in
financial economics 13, pg. 53-81
Summers S. L, Sweeney J.T. (1998). Fraudulently Misstated Financial Statements and Insider
Trading: An Empirical Analysis. The Accounting Review, 73(1), pg. 131–146.
Spathis,C.T. (2002). Detecting False Financial Statements Using Published Data: Some
Evidence from Greece. Managerial Auditing Journal, 17(4), pg. 179-191.
Turner, J. L., Mock, T.J., & Srivastava, R. P. (2003). An Analysis of the Fraud Triangle.
Research roundtable, vol.35.
Watts, R, L., and Zimmerman, J, L. (1986). Positive Accounting Theory. New York, Prentice
Hall.
Wang, T. (2008). Real Investment and Corporate Securities Fraud. Working Paper, University
of Minnesota.
Wells, J. (1997). Corporate fraud handbook: Prevention and detection. Hoboken, NJ: Wiley.
Zack, G.M. (2013). Financial Statement Fraud: Strategies for detection and investigation.
Hoboken, New Jersey: John Wiley & Sons, Inc.
Zimbelman, M.F. (1997). The Effects of SAS No.82 on Auditors’ attention to Fraud Risk
Factors and Audit Planning Decisions. Journal of Accounting Research, Vol.35, pg.
75-97
Zhao, Y. and Chen, K.H.(2008). Staggered Boards and Earnings Management. The Accounting
Review, 83(5), pg. 1347-1381
Fakultas Ekonomika dan Bisnis
Universitas Kristen Satya Wacana
1955