Financial Statement Fraud: The Predictive Relevance of Fraud Hexagon Theory

Abstract

The pandemic situation has suppressed various businesses in Indonesia and has provided opportunities for business actors to practice window dressing for presenting good company performance. The practice of window dressing is an example of financial statement fraud. Therefore, to anticipate this fraud, it is very important to examine the factors that cause companies to commit financial statement fraud. This study aims to analyze the fraud hexagon theory and its relationship with financial statement fraud. The research was conducted on state-owned companies listed on the Indonesia Stock Exchange (IDX) for the last 5 years (2016-2020). The method used to test the hypothesis is log-regression analysis. The results of the study prove that external pressure as a proxy for stimuli, CEO duality as a proxy for collusion, and nature of the industry as the proxied opportunity have predictive relevance to financial statement fraud. Even though from ten hypotheses only three hypotheses are proved, this result implied that when companies face a difficult situation and cannot achieve their financial target and they have the opportunity to change their financial records, it is very probable that they will conduct a financial statements fraud. Thus, the government needs to monitor and make policies to prevent this conduct for state-owned companies and other companies listed in IDX

Impact of Whistleblowing System Between the Vousinas Fraud Hexagon Theory and Financial Statement Fraud

“…One example is investor expectations regarding management performance in managing company assets (Ozcelik, 2020). Conflicts of interest drive FSF, which is motivated by incentives offered for managers' performance to meet the shareholders' expectations (Khamainy et al, 2022). Fraudulent acts can also be driven by extra incentive motives received when financial targets are achieved (Akbar et al, 2021).…”

“…One way to measure opportunity is the control system's effectiveness (Oktavia et al, 2022). The board of commissioners holds a supervisory function to improve the quality and effectiveness of internal control (Khamainy et al, 2022). Effective monitoring mechanisms can minimize and control the possibility of fraudulent acts (Le & Tran, 2018;Septriani & Handayani, 2018).…”

“…Managers also try to show that companies operating under their auspices have optimal performance (Septiningrum & Mutmainah, 2022). Managers do not want to be left behind by not showing their achievements and positions in their companies (Khamainy et al, 2022). Rahma and Sari (2023) revealed that ego or arrogance influences FSF.…”

“…Rahma and Sari (2023) explain that collusion encourages the formation of evil conspiracies to build fraudulent action schemes. Losses can increase when collusion is carried out collectively (Khamainy et al, 2022). Susandra and Hartina (2017) explain the characteristics of conspiracy, namely the presence of intermediaries in the procurement of goods and services as well as easing incentives to make a process more accessible.…”

“…People who work closely with money will shrewdly search for ways to justify their dishonest behavior; according to Lionardi and Suhartono (2022) and Reurink (2018), a person's ability might give fraudsters the courage to be confident in their transgressions. Khamainy et al (2022) and Oktavia et al (2022) revealed that pressure, opportunity, rationalization, and capability do not affect FSF. The argument is supported by Chantia et al (2021), who indicate that FSF is not significantly impacted by capability or rationalization.…”