Fraud in Financial Statements

Financial statement fraud is a discrepancy between the application of accounting principles and the preparation of financial statements with the aim of deceiving and deceiving users of financial statements. The approach taken to identify the factors that influence financial statement fraud, one of which is the fraud hexagon model. There are six factors in the fraud hexagon, namely Stimulus which will be represented by financial targets, Ability will be represented by a change of director, Collusion will be represented by political connections, Opportunity will be represented by the quality of external auditors, Rationalization will be represented by audit opinion and Ego is represented by many photos CEO. This study aims to analyze the effect of the fraud hexagon on fraudulent financial statements in infrastructure, utility and transportation sector companies listed on the Indonesia Stock Exchange in 2015-2019. Detection of the possibility of fraudulent financial statements is measured by the F-Score model. This study uses a purposive sampling technique with a sample of 25 companies and 125 data on annual reports and financial statements. The results showed that financial targets, the quality of external auditors, and the number of CEO photos had no effect on financial statement fraud, while the change of directors had a negative and significant effect on financial statement fraud, political connections had a positive and significant effect on financial statement fraud. Audit opinion has a negative and significant effect on financial statement fraud.

Financial statement fraud is an intentional misstatements, omissions or disclosure in financial statement done by an individual or a party to mislead financial statement users when making decisions. Financial statement fraud committed by irresponsible parties for their own advantage can lead to long-term losses. The purpose of this study is to examine the effects of fraud pentagon theory for detecting financial statement fraud in banking companies listed in the Indonesia Stock Exchange for 2020-2022 period. This study was analysed using multiple regression research method which processed using SPSS 25. The data used in this study was secondary data from financial statement and annual reports. This study used purposive-sampling technique with sample of 90 data observations. The results of this study shows that financial stability and changes in auditor have a significant and negative effect on financial statement fraud. Meanwhile external pressure, monitoring effectiveness, changes in director, and frequent number of CEO’s picture in annual report have no significant effects on financial statement fraud.

Financial statement fraud is a misrepresentation and intentional concealment of facts on account values in the financial statements which results in irrelevant financial information. Fraudulent financial statements can lead to internal and external conflicts within a company that can harm decision makers. This study aims to determine the effect of the fraud hexagon which consists of pressure (external pressure), capability (change of director's), opportunity (nature of industry), rationalization (auditor's opinion), arrogance (frequent number of CEO's picture), and collusion (government projects) simultaneously or partially against fraudulent financial statements on LQ 45 index companies listed on the Indonesia Stock Exchange for the 2016-2020 period. This study uses purposive sampling technique in determining the sample in order to obtain 24 companies in the LQ 45 index listed on the Indonesia Stock Exchange. This study uses a descriptive type of research with logistic regression analysis techniques using SPSS 25 software. The results of this study indicate that pressure, capability, opportunity, rationalization, arrogance, and collusion have a simultaneous effect on financial statement fraud. The partial test results show that rationalization, arrogance have a positive effect and pressure, capability, opportunity, collusion have no effect on financial statement fraud on LQ 45 index companies listed on the Indonesia Stock Exchange for the 2016-2020 period.

Detecting evolutionary financial statement fraud

This study aims to examine the influence of external pressure, financial target, ineffective monitoring, rationalization, and capability on financial statement fraud. Financial Statement Fraud is measured by earnings management using discretionary accruals. This study uses secondary data were taken from the manufacturing companies which are listed in Indonesian Stock Exchange. Sample selection is done by purposive sampling method and sample obtained from this research were 45 of a total 135 companies. Method of analysis used multiple linear regression analysis. The result show that simultanoeusly of external pressure, financial target, ineffective monitoring, rationalization, and capability have a significant influence on financial statement fraud. Partially, external pressure, financial target, rationalization, and have no significant influence on financial statement fraud. Ineffective monitoring partially has a significant influence on financial statement fraud.

Financial fraud hasattracted the attentions of researchers because it concerns with many different market participants. The fraudulent firms provide misleading information in the financial reports in order to achieve unethical goals. Investors can suffer losses if they use such information to make decisions. Therefore, it is important to detect fraud in financial statements. This paper includes two parts: Part I talks about the motivations and influences of financial frauds. Part II talks about how to detect financial fraud in the financial statements.

This study aims to determine the Pentagon Determinant Fraud in detecting fraudulent financial statements. Fraudulent financial statements are proxied by the Fraud Score Model. Whereas the pressure factor is proxied by insisting from within, for the opportunity factor proxied by industry conditions, the rationalization factor is proxied by the ratio of total accruals, the competency factor is proxied by the change of directors and arrogance is proxied by the duality of quality positions at the CEO. The population in this study amounted to 100 companies incorporated in the compass index 100 contained in the Indonesia Stock Exchange and for the sample of the study were 35 companies belonging to the compass index 100 contained in the Indonesia Stock Exchange, which was selected using the purposive sampling method for the 2017-2018 period. Data were analyzed using multiple linear regression. Based on the test results, it was concluded that the pentagon fraud component included internal pressure (LEV), industry conditions (INVENTORY), rationalization (TATA) influencing financial statement fraud while competence (DCHANGE) and arrogance (DCD) had no effect on financial fraud statement. This proves that internal pressure (LEV), industry conditions (INVENTORY), and rationalization (TATA) can be used to detect fraud in financial statements.

Financial statements are a medium to provide useful information for stakeholders and parties involved. Correct information will help all parties to make the right decisions in carrying out economic or business activities. Fraud is common in the financial and non-financial industries today. Fraud in the financial industry is commonly referred to as financial statement fraud. Up to the third quarter of 2018, 36 banks indicated the occurrence of fraud. This study aims to examine the fraud triangle factor in detecting financial statement fraud. The object of this study uses 43 banking companies listed on the Indonesia Stock Exchange period 2015-2019. Analysis data was using panel regression analysis. The results show there is a significant relationship between financial stability and the rationalization of financial statement fraud. Meanwhile, financial targets, external pressure, and ineffective monitoring did not have a significant effect on financial statement fraud.

The purpose of this study is to analyze the detection financial statement fraud using fraud diamond perspective. The variable in this study consists of financial statement fraud as dependent variable and fraud diamond such as financial target, financial stability, monitoring effectiveness, nature of industry, auditor change, and director change as the independent variables. This study used purposive sampling on manufacturing company listed in the Indonesia Stock Exchange from 2018-2020 period with a total observation of 166 sample. Multiple linear regression is used to analyze the use of fraud diamond on detecting financial statement fraud. The research finds that nature of industry, and financial stability have significant effect on financial statement fraud. Contrarily, variables such as financial target, monitoring effectiveness, auditor change, and director change have no significant effect on financial statement fraud. Thus, only nature of industry, and financial stability can be used to detect financial statement fraud.Â

The rise of financial statement fraud is currently the basis for research conducted. Companies often use financial statement fraud schemes. These show how important it is to check on a business' health often and take corrective measures if necessary. Falsifying financial accounts is a common practice among businesses to give the impression that everything is fine when it is not. The purpose of this study is to estimate and analyze how financial stability and financial distress impact financial statement fraud. The investigation will encompass all manufacturing businesses listed on the Indonesia Stock Exchange between 2020 and 2022. Based on the results of the purposive sampling method, We used a sample size of 35 companies for the study, which equates to about 105 sample data will be observed for three years, from 2020 to 2022. After that, multiple linear regression is used to analyze the data. This study contributes to the increasing body of data indicating the incidence of fraudulent accounting is not the same in times of economic boom and bust. This research shows that financial stability has not a deleterious effect on the likelihood of financial statement fraud and financial distress significantly and positively affects financial statement fraud.. The implication to the research, it is crucial for businesses to adopt preventive measures and to ascertain early on whether they are healthy or not in order to avoid making false financial statements.

Purpose—This study aims to analyze the Pentagon fraud theory for detecting fraud in financial statements, with the audit committee as a moderating variable. Design/methodology/approach — This study's population is manufacturing companies listed on the Indonesia Stock Exchange in 2018-2020. The research sample is 198, comprising 66 company annual reports for three years. The analysis technique used in this study is multiple linear regression and uses the MRA (Moderating Regression Analysis) method through IBM SPSS version 26 software. Findings—The results showed that the variables of pressure and arrogance influenced fraud in financial statements, while the variables of opportunity, rationalization, and competence did not. The pressure and opportunity variables affect fraud in financial statements after being moderated by the audit committee variable, while the rationalization, competency, and arrogance variables have no effect. Practical implications — Practical benefits for stakeholders as a source of information regarding factors that can be detected as a cause of fraud in financial statements. That is expected to avoid or minimize fraud and fraudulent financial statements, which can later develop and harm many parties, especially business people. Originality/value — The difference between this study and previous research lies in using variables, research objects, research periods, and measurements that previous researchers have not carried out. Paper type — Research paper

This study aims to examine the effect of Fraud Hexagon on Financial Statement Fraud in mining companies listed on the Indonesia Stock Exchange (IDX). Fraud Hexagon consists of pressure, opportunity, rationalization, capability, arrogance, and collusion, while Financial Statement Fraud is measured using the Beneish M-Score. This study uses a quantitative approach with logistic regression analysis and purposive sampling techniques based on the companies' financial statements and annual reports for the observation period. The results show that simultaneously, the Fraud Hexagon influences Financial Statement Fraud, but partially, not all variables have a significant influence. These findings are expected to contribute to the detection and prevention of financial statement fraud in the mining secto. Keyword: Fraud Hexagon, Financial Statement Fraud, Beneish M-Score, Pertambangan.

The purpose of this study is to detect the occurrence of fraudulent financial statements through the perspective of the fraud triangle in LQ45 companies listed on the Indonesia Stock Exchange in 2018-2020. Indications of financial statement fraud in this study are proxied by earnings management which is measured using the Modified Jones model. The method used in this research is literature study and documentation. The sample in this study was decided by using a purposive sampling method from LQ45 companies listed on the Indonesia Stock Exchange during 2018-2020, resulting in a total of 57 company observations. The data analysis used in this research is multiple linear regression analysis. The results of this study indicate that the pressure and rationalization variables have no partial effect on financial statement fraud. While the opportunity variable has no partial effect on financial statement fraud. Simultaneously, diamond fraud has a significant effect on financial statement fraud.

PurposeThis study aims to assess the relationship between managerial entrenchment and the chance of fraud in financial statements, which are the only available source for shareholders’ decisions, so their accuracy and reliability are of great importance. Hence, the realization of contributing factors to preventing financial information distortion is vital. Moreover, managerial entrenchment on the chance of fraud in the company’s upcoming years has also been analyzed.Design/methodology/approachThe factor analysis of five variables [chief executive officer (CEO) duality, managerial ownership, board independence, board compensation and CEO tenure] is used for management entrenchment. To examine the hypothesis testing, multivariate regressions, feasible general least squares regression and Logit model regression are used. The statistical sample under study in this paper includes 1,122 year-company observations during 2013–2018 and Beneish’s (1999) model is used for evaluating fraud.FindingsThe study results show a negative and significant relationship between management entrenchment and the chance of fraud in financial statements. That means managers with a higher degree of managerial entrenchment are more likely to create value and acquire wealth for the firm, and that causes them not to waste and waste the firm resources through enhancing the supervisory mechanisms. Moreover, the study results also show that improving and strengthening management entrenchment will lower the upcoming years’ fraud condition.Originality/valueThe current paper is the first time that the relationship between managerial entrenchment and financial statement fraud is assessed within a study. The results of the paper help the beneficiaries and shareholders realize different aspects of management entrenchment. That means managers’ power and authority can be used to make shareholders’ interests, but they can hinder misuse and fraud.

With the prevalence of Internet AI technology, financial fraud becomes an imperative problem, especially in the context of machine learning. Technologies such as deep learning and natural language processing provide effective tools for detecting fraud with the guidance of financial statements, improving the efficiency and accuracy of data analysis, and helping to ensure financial safety. In this study, we propose a sophisticated representation learning method to detect financial statement fraud by tracking the detailed changes in the company’s Management Discussion and Analysis (MD&A) documents over time. Unlike traditional word frequency methods, we align paragraphs between consecutive disclosures based on their similarity at the paragraph level and categorize them into three types: added, deleted, and matched. Next, we create multivariate change trajectory representations based on fraud-related word categories. Finally, we use these word-level change trajectories to design a fraud detection model and compare it with several traditional models as well as the latest Time-Series Foundation Models. Experiments on 24 years of financial report data, from 1995 to 2019, show that our representation learning method significantly improves the performance of financial statement fraud detection across 11 different machine learning models, consistently outperforming traditional word frequency methods. Our method opens a new paradigm for feature engineering in financial statement fraud detection. Our code can be found at https://github.com/LittelStudent/Financial-Statement-Fraud-Detection-ParaEmb-FraudW2V .