Red Flags and Fraud Prevention on Rural Banks

Abstract

This paper identifies the effectiveness of the red flags in detecting fraudulent financial statements, as well as preventive measures appropriate to implemented in Bank Perkreditan Rakyat (BPR). We use field survey convering the whole BPR in Province Bali, covering 60 indicators provided to 101 internal auditors from 86 BPR. The result shows that the highest dimensions within the Fraud Diamond are capability. Efforts to prevent the fraud would be the culture of honesty and high ethics, evaluating anti-fraud process and control, and developing an appropriate oversight process.

Financial performance of rural banks in Indonesia: A two-stage DEA approach

“…In some regions, the same results are also shown, specifically, efficient BPRs are less than those that are inefficient, such as in Semarang ( Septianto and Widiharih, 2010 ) and Jakarta-Bogor-Depok-Tangerang-Bekasi (JABODETABEK) ( Hartono et al., 2008 ). The average technical efficiency of BPR that is lower than BPRS may be due to the number of cases of fraud in BPR that are very serious ( Rustiarini et al., 2016 ). As a result of this fraud, the community is increasingly distrustful of BPRs, which has resulted in a decline in their performance.…”

“…Regions that have 3 BPRS samples, namely Semarang City, Pasuruan City, Bekasi City, Bantul Regency, Kampar Regency, Banyumas Regency, Solo City, Bekasi Regency, Depok City, Bogor Regency, Cilacap Regency, and Sidoarjo City. While the regions that have more than three BPRS as samples are Bandung and Sleman regencies with a total sample of 5 BPRS per region and Serang Regency with 4 samples ( Anwar, 2016 ; Ibrahim, 2019 ; Rustiarini et al., 2016 ).…”

“…While in the input aspect, the costs of BPR are in the form of interest paid to customers' funds or other banks that save their money in the form of savings or time deposits. The costs are in the form of profit sharing from customers' deposits, using mudharabah contracts and bonuses on wadiah ( Anwar, 2016 ; Devi and Firmansyah, 2018 ; Ibrahim, 2019 ; Rustiarini et al., 2016 ).…”

“…According to the Indonesia Deposite Insurance Aggency or Lembaga Penjamin Simpanan/LPS (2019) , from January 2006 to August 2016, 72 units or 4.4 percent BPRs and two units or 1.2 percent BPRSs were liquidated. Moreover, there were 24 BPR and BPRS in the liquidation process from September 2016 to July 2019 due to their inability to compete in the banking industry and the numerous acts of fraud committed by the management or owner of that micro bank which lead to criminal cases ( Rustiarini et al., 2016 ). Furthermore, similar to Islamic commercial banks that conduct their business based on Sharia principles, BPRS and BPRs are not expected to repeat the same mistakes.…”

Fraud Risk and Earnings Management

“…Based on the concept of fraud triangle, Statement on Auditing Standard No. 99 requires external auditors to use 42 (forty two) red flags when detecting fraudulent financial statements (Rustiarini, Suryandari, and Nova 2017). The Fraud triangle consists of three general conditions that are present when fraud occurs, namely pressure, opportunity, and rationalization (Tuannakotta 2010: 207).…”