Analysis of Fraudulent Financial Reporting With the Role of KAP Big Four as a Moderation Variable: Crowe's Fraud's Pentagon Theory

Abstract

The purpose of this study is to provide empirical evidence of pentagon fraud risk factors sush as financial targets, financial stability, number of audit committee members, nature of industry, change in auditors, auditor opinion, change in director, proportion of the independent commissary, frequent number of CEO pictures, and CEO duality on fraudulent financial reporting with KAP big four as a moderating variable. The samples in this study were all state-owned companies listed on the Indonesia Stock Exchange in 2014-2018. The purposive sampling technique was used in sampling so that 55 companies were obtained. This study uses logistic regression analysis techniques with SPSS version 26. The results of the study indicate that financial stability and the auditor's opinion influence the fraudulent financial reporting. However, financial targets, number of audit committee members, nature of industry, change in auditors, change in director, proportion of the independent commissary, frequent number of CEO pictures, and CEO duality not effect on fraudulent financial reporting.

Factors that affect Fraudulent Financial Reporting

“…Companies need to have a supervisory unit that is capable of monitoring the operations of the company in order to avoid fraudulent reporting activities done by management (Akbar 2017). Fraud can happen because of the company's weak internal control, and there are no prevention nor prior detection (Sari et al 2020). Thus, this can create an opportunity for company to do fraud.…”

“…Eliminating fraud trail can be done by companies by changing auditors. Thus, the more fraud occurs in a company, the more frequent changes of auditors happened (Sari et al 2020). Besides that, when changes in auditor occurs, fraud committed by the company could be undetected by the auditor since they are still unfamiliarized with the thorough condition of the company (Hidayah and Saptarini 2019).…”

Fraud Hexagon and Fraudulent Financial Statement: Comparison Between OMI and Beneish Model

“…Cousins [5] stated that arrogance is the main element that plays a vital role in forcing people to commit fraud. However, previous findings [19], [20], [21] do not prove the accuracy of arrogance in influencing FFS. So, this study follows the ego measurement conducted by [22].…”

“…This study makes improvements to several measurements of elements in the fraud hexagon, which follow [19], [21], [22], and [38]. The elements in the fraud hexagon are measured as follows: stimulus is measured using FCF [21]; capability is measured using the change of directors, the opportunity is measured using the ratio of receivables to sales, rationalization is measured using auditor turnover [39]; arrogance is measured using the natural logarithm of directors' remuneration [22], and collusion is measured using the ratio of total R PT to equity [38].…”

“…In addition, there are still some less accurate findings in previous studies. [18], [19], [20], and [17] view that pressure only comes from the company's financial targets, while [21] states that the existence of free cash flow (FCF) causes management to be pressured to manage the money, causing management to conduct FFS. Therefore, this study measures the stimulus using how much FCF management has.…”