fraudulent financial statement detection with ...digilib.unila.ac.id/60960/18/skripsi tanpa bab...

FRAUDULENT FINANCIAL STATEMENT DETECTION WITH FRAUD

PENTAGON ANALYSIS IN BANKING COMPANIES IN FIVE ASIA-

PACIFIC COUNTRIES

(Empirical Studies of Financial Company listed in IDX, SGX, MYX, PSE,

ASX, in period of 2013-2018)

(Undergraduate-thesis)

By

Adrima Jusata Nicholas Tarigan

ECONOMIC AND BUSINESS FACULTY

UNIVERSITY OF LAMPUNG

BANDAR LAMPUNG

2020

ii

ABSTRACT



PACIFIC COUNTRIES



By


Financial Statement is an important component in a company, as an important

source of information, company condition can be reflected in the financial

statement. However, there are many loopholes in the financial statements which

can become a chance for the management and certain parties to commit fraud on

the financial statements. This study aims to examine and analyze the elements of

fraud in fraud pentagon theory against indications of fraudulent financial reporting

on banking sector in chosen five Asia-Pacific countries Indonesia, Singapore,

Malaysia, Philippine, Australia in range year of 2013-2018.

Independent variables in this research were financial targets, financial stability,

external pressure, ineffective monitoring, auditor opinion, change of directors, and

CEOs who have dualism positions, while the dependent variable was intentional

fraudulent financial reporting that proxied by earning management to using

discretionary accruals modified Jones Model.

The results of this study indicate that there are two variables which were

significant in detecting the occurrence of fraudulent financial reporting These

variables represent the one elements in a pentagon fraud Crowe's theory; pressure.

Keywords: Fraud, Fraud Triangle, Fraud Diamond, Fraud Pentagon, Fraudulent

Financial Reporting, Financial Restatement

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PACIFIC COUNTRIES



By

ADRIMA JUSATA NICHOLAS TARIGAN

Undergraduate-thesis

As one of Requirements to Achieve

BACHELOR OF ACCOUNTING

In

Accounting Department

Faculty of Economics and Business of Lampung

ECONOMIC AND BUSINESS FACULTY

UNIVERSITY OF LAMPUNG

BANDAR LAMPUNG

2020

vii

BIOGRAPHY

The author was born in Kaban Jahe, July 13, 1997 is the first

child of two siblings from the couple Mr. Masmur Tarigan and

Rina Malem Br. Ginting. The author completed Kindergarten

at Budi Asih Kindergarten in 2003, then completed elementary

school education at the Santa Lusia Catholic School in Bekasi

in 2009, continued his Secondary Education at the Santa Lusia Catholic School in

Bekasi and graduated in 2012. The author continued his high school studies in SMA

Negeri 90 South Jakarta, and graduated in 2015.

After graduated from senior high school, author continued his study in University

of Lampung with accounting majority. In second semester joining the International

Class Program, while being International Class student author obligated to have

international experience thus in 2017 author take a short course program the 5th

Asian Cooperative Program (ACP) at University of Utara Malaysia (UUM) which

cooperate with Kansai University of International Studies (KUIS)

As a student author was also active in campus activities, in the first year Author

was part of the Young Brigadier of BEM Unila, in the second year was believed to

be a Secretary of Division the FEB Unila Accounting Student Association

viii

(HIMAKTA), in the third year he was the Head of the Member Resource

Development Bureau (PSDA ) in the Accounting Student Association, in the fourth

year besides completing his study and thesis author also joined the Marketing Team

of the CICIL.CO.ID Student Financing Special Startup Company as Ambassador.

ix

DEDICATION

Praise and gratitude toward My Lord Jesus Christ, I’m so grateful for His

blessing, thus this undergraduate thesis can be completed.

I dedicated This undergraduate thesis to the most important people in my

life:

My Beloved Parents Mr. Masmur Tarigan, Mrs. Rina Malem Br. Ginting,

My little sister Regina Meilija Paqita Tarigan

truly grateful to be surrounded and guided by an incredibly supportive family.

Thank you for always let me to be my own self, trust and let me choose all the

things without interfering with my choice, thanks for let me be the best version of

myself. I would not be who I am today without their guidance, love, advices,

prayers, and unconditional supports for my success.

My Almamater, University of Lampung.

x

MOTTO

“You are the salt of the earth, but if the salt has lost its flavor, with what will it be

salted? It is then good for nothing, but to be cast out and trodden under the feet of

men.”

— Matthew 5:13

“You are the light of the world. A city located on a hill can't be hidden.”

— Matthew 5:14

“Neither do you light a lamp, and put it under a measuring basket, but on a stand;

and it shines to all who are in the house. Even so, let your light shine before men;

that they may see your good works, and glorify your Father who is in heaven.”

— Matthew 5:15–16

“Commitment is the Key of Success

Menjadi Luar Biasa, Semakin Luar Biasa, Sangat Luar Biasa”

— Drs. Parjuangan Lubis, M.M

“Menjadi berguna dan bermanfaat bagi sesama adalah kunci kebahagiaan”

— Adrima Jusata Nicholas Tarigan

xi

ACKNOWLEDGEMENT

Praise and gratitude toward Jesus Christ for His mercy and guidance, thus the

researcher can complete this undergraduate thesis, entitled “Fraudulent Financial

Statement Detection with Fraud Pentagon Analysis in Banking Companies in Five

Asia-Pacific Countries (Empirical Studies of Financial Company listed in IDX,

SGX, MYX, PSE, ASX, in period of 2013-2018)”. This undergraduate thesis is

one of the requirements to receive the Undergraduate Degree in Faculty of

Economics and Business, University of Lampung

During the process of preparing this undergraduate thesis, the researcher realized

that this achievement would never have come into existence without any supports,

encouragements, and assistance by several important people. Thus, the researcher

would like to express gratitude to:

1. Dr. Nairobi, S.E., M.Si., as the Dean of the Faculty of Economics and

Business, University of Lampung period of 2019-2023.

2. Prof. Dr. H. Satria Bangsawan, S.E., M.Si., as the Dean of the Faculty of

Economics and Business, University of Lampung for the period of 2015-

2019. Whom in his leadership let me as student to express and evolve from

ordinary to be an extraordinary student.

3. Dr. Farichah, S.E., M.Si., Akt, CA. as Head of Accounting Department of

the Faculty of Economics and Business, University of Lampung for the

xii

period of 2015-2019. Thankyou for all the opportunities gave to me, and also

for being a good mentor for me.

4. Mrs. Yuztitya Asmaranti, S.E., M.Si., as the Secretary of Accounting

Department of Faculty of Economic and Business, whom also my Co-

Advisor for the willingness to provide guidance, knowledge, time, criticism,

suggestions, and direction, during the completion of this undergraduate

thesis.

5. Prof. Dr. Lindrianasari, S.E., M.Si. Akt. CA. as the New elected Head of

Accounting Department for period of 2020-2024 and also as the Main

Advisor, for the willingness to provide guidance, knowledge, time, criticism,

suggestions and direction, during the completion of this undergraduate thesis.

6. Dr. Ratna Septiyanti, S.E., M.Si., as my Academic Advisor, for his attention,

motivation and guidance as long as the researcher go through college life,

whom also being my Chief Examiner in all seminar and Trials, who has

given time, knowledge, criticism, suggestions and direction in the

completion of this undergraduate thesis.

7. All Lecturers in the Faculty of Economics and Business and especially

Lecturers in the Accounting Study Program who have provided their services,

knowledge and learning while the author completed his education at the

University of Lampung.

8. All Employees in the Faculty of Economics and Business, University of

Lampung. Mbak Tina, Mbak Diana, Mas Veri, Mpok, Mas Yana, Mas Yogi,

Mas Rohaidi, Mas Bolang, Mas Nanang, Miss Suri, Bang Jaya, Kak Sella,

xiii

Mas Andri, Mbak Wanti, for their help and service as long as the writer

studies at Lampung University

9. Both of my Beloved Parents Mr. Masmur Tarigan, Mrs. Rina Malem, Br.

Ginting who have given the sincerest love, endless prayer, support and

advice in the achievement of my ideals. Thank you for all the never-ending

faiths and infinite love, both of them are my hero.

10. My Little Sister Regina Meilija Paqita Tarigan, thank you for all the

motivations, love, understanding, prayer, and laughter all this time since we

were kids.

11. My Late Grandma, or Yayang or Bayang, my late Aunt, and Uncle who also

fill my childhood memories with laughter, love, care and compassions, it’s

very sad not seeing you here I hope that you resting in peace in Heaven with

Jesus Christ.

12. My Cousin Sister Mrs. Nurheni and her family, which has provided a place

to live and study while studying at the University of Lampung

13. My big family, who cannot be mentioned one by one. Thank you for your

prayers, support, motivation and advice given.

14. Billingual Class Batch 2015 Ayu Budi, Ayu Fatma, Nr. Khairani, Cindy

Carolin, Defita Septia, Stefanus Erik, Elia Agusta, Rachma, Nabila Febi,

Karina, Mutiara, CIA, Icha, Astri, Monica, thank you for being a part of my

college life from the beginning to the end, thank you for all the support, and

sweet memories we shared together. I hope we become successful in the

future.

xiv

15. My Overseas friend from 5th & 6th ACP Friend in Malaysia also in Lampung,

Sakura, Meika, Seiji, Hori, Hiroya Syahmi, Cikgu Jenne, Iman, Adi, Fairy,

Aimi, Daichi, Juuna, Danial, Harumi, Shiori, Maha, Takuma, Yuka, Nisha,

Ericka, Juuri, Kyoka, Akari, Yuuya, Hinako, Toshi, Mai.

16. My Overseas friend From Aoyama Gakuin, Minna, Misaki, Ayumi, Chinatsu,

Mayu, Natsuki, Ayana, Anna, Yukino, Yui, Kumiko, Shogo, and Li.

17. Korps Anak Yuk Ani officials Reyhan, Tio, Lilis, Bowo, Indra, and Non-

Officials David, Dio, Khalid, Warek, Pai, Udin who supporting and

motivating each other through this college life. Keep fighting for our

success.

18. Brigadir Muda BEM FEB and Also all Presidium of BEM FEB, period

2015-2016, thank for the memories, knowledge, and experience.

19. Himakta Board of Presidium period 2016-2017 and Period 2017-2018, tum

Ely, Kum Nab, Dum Fer, Ujo, Alvin, Niken, Amoy, Mauldan, Akbar, Enon,

Zahrah Salsabila, Khalid, Habib. Susi, Leon, Tio, Intan, Nabila, Hasnah,

Habib, Sugeng, Rinda, Rifqi, Faby, thank you for giving a place that feels

like family and a place where all magic can Happen. May success be upon

you all

20. My Accounting Friend Annisa Nadhila, Aziza, Zahrah, Dian, Muti, Kiki,

Suci, Adzkia, Novira, Laili, Ilma, Oliv, Bella, Susi, Wuri, Rona, Nuri,

Ikhwan, Iqbal, Toni, Risna, Tisel, Yolan, Mahest, Anisya, Fame, Dara,

Martha, Merti, Fariz, Putri, Ayu, Intan, Ely, Destty, Citra Thank you for all

the support, prayer, passion, motivation,and cheerfulness during the lecture.

xv

21. All of my Juniors who always helpful, demanding, and asking for a feast and

treat Samuel, Almira, Farel, Chelsea, Billy, Rinda, Derri, Derra, Derry,

Sugeng, Hasnah, Tika Larasati Harjito Putri, Hana Ayu Mardhia, Dini

Rahmah Sari, Safitri, Puspita, Tanti, Maya, Tasya, Ivory, Dita, Murni, Arya,

Leon, Lulu, Icha, Tumi, Desta, And my other Junior whom I can’t mention it

one by one thanks for everything be a good, success and useful Person, my

pray for you.

22. All of My Senior in Accounting whom I cannot mention all the names, who

give me insight, knowledge, experience, partnership, Family and compassion.

23. My CEO at JombloMilk Bandarlampung Mr. Reza Guntara, S.E, who gave

me a chance to cooperate as partnership COO in JombloMilk and knowledge

and wisdom about Entrepreneurship. Success may be upon you.

24. My Sister from another Dimensions Sesiliya Elvira, S.Ak who thought me

everything about taking care of ourselves that useful for me and also as

partner in discovering Lampung greatest Culinary, May success be upon

you.

25. Someone whose name should be written in this section, always be happy,

don't lose your smile, if destiny do separates us, then so be it. I know that

nothing can be forced in this world.

26. All friends, relatives and other parties who cannot be named one by one for

your help and support, the authors say thank you, hopefully get a reply from

the Almighty.

xvi

The author realizes there are still many shortcomings in the process of writing this

thesis; the authors expect a criticism or suggestion that can help the author in

improving to be better., hopefully this thesis can provide benefits for those who

read it.

Bandar Lampung, 21 January 2020

Author,


xvii

TABLE OF CONTENT

Page

LIST OF TABLES ......................................................................................... xx

LIST OF FIGURES ....................................................................................... xxi

LIST OF APPENDICES................................................................................ xxii

CHAPTER 1 PRELIMINARY ............................................................................... 1

1.1 Background ................................................................................................ 1

1.2 Formulation of Problem ............................................................................. 10

1.3 Research Purpose ....................................................................................... 11

1.4 Research Benefit Benchmark ..................................................................... 11

CHAPTER 2 LITERATURE REVIEW ...................................................... 13

2.1 Theoretical Basis ........................................................................................ 13

2.1.1 Agency Theory ............................................................................ 13

2.1.2 Fraudulent Financial Reporting................................................... 14

2.1.3 Triangle Theory ........................................................................... 16

2.1.4 Diamond Theory ......................................................................... 18

2.1.5 The Pentagon Theory .................................................................. 20

2.2 Research Framework .................................................................................. 22

2.3 Hypothesis Development ........................................................................... 22

2.3.1 Financial targets influence in detecting Fraudulent financial

reporting. ..................................................................................... 22

2.3.2 The effect of Financial stability in detecting Fraudulent

financial reporting ....................................................................... 23

2.3.3 Effect of External pressure in detecting Fraudulent financial

reporting financial reporting ....................................................... 24

2.3.4 Effect of Ineffective monitoring in detecting Fraudulent

financial reporting ....................................................................... 26

2.3.5 The effect of Rationalization in detecting Fraudulent financial

reporting ...................................................................................... 28

2.3.6 The effect of changes in company directors in detecting

Fraudulent financial reporting .................................................... 29

xviii

2.3.7. The influence of the CEO or president who has dualism in the

company in detecting Fraudulent financial reporting ................. 30

CHAPTER 3 RESEARCH METHOD ......................................................... 32

3.1 Sample and Gathering Data ....................................................................... 32

3.1.1 Population ................................................................................... 32

3.2 Data Types and Sources ............................................................................. 33

3.3 Research Variable ...................................................................................... 33

3.3.1 Dependent Variable ..................................................................... 33

3.3.2 Independent Variable Measurement ............................................ 35

3.4 Analysis Methods ....................................................................................... 35

3.4.1 Descriptive Statistics ................................................................... 36

3.4.2 Classic Assumption Test ............................................................. 36

3.4.2.1 Normality Test ................................................................ 36

3.4.2.2 Multicollinearities Test ................................................... 37

3.4.2.3 Autocorrelation Test ....................................................... 37

3.4.2.4 Heteroskedastic Test ....................................................... 38

3.4.3 Hypothesis Test ........................................................................... 39

3.4.3.1 Determinant Coefficient ................................................. 40

3.4.3.2 Model Significance Test ................................................. 40

3.4.3.3 Individual Parameter Test ............................................... 40

CHAPTER 4 RESEARCH RESULT ........................................................... 42

4.1 Data Analysis ............................................................................................. 42

4.1.1 Descriptive Statistic in General ................................................... 42

4.1.2 Descriptive Statistic in Australia Stock Exchange ...................... 46 4.1.3 Descriptive Statistic in Indonesia Stock Excange ...................... 48

4.1.4 Descriptive Statistic in Malaysian Stock Exchange .................... 50

4.1.5 Descriptive Statistic in Philippine Stock Exchange .................... 52

4.1.6 Descriptive Statistic in Singapore Stock Exchange .................... 54

4.2 Classic Assumption Test ............................................................................ 56

4.2.1 Normality Test ............................................................................. 56

4.2.2 Multicollinearities Test ............................................................... 57

4.2.3 Autocorrelation Test .................................................................... 59

4.2.4 Heteroskedastic Test.................................................................... 60

4.3 Hypothesis Test .......................................................................................... 61

4.3.1 Model Significance Test .............................................................. 63

4.3.2 Determinant Coefficient Test ...................................................... 64

4.3.3 Individual Parameter Test ........................................................... 65

4.4 Hypothesis Study ....................................................................................... 68

4.4.1 Influence of financial target variable on fraudulent financial

reporting detection. ..................................................................... 70

4.4.2 Influence of financial stability variable on fraudulent financial

reporting detection ...................................................................... 71

4.4.3 Influence of external pressure variable on fraudulent financial

reporting detection. ..................................................................... 73

xix

4.4.4 Influence of ineffective monitoring Variable on fraudulent

financial reporting detection. ...................................................... 75

4.4.5 Influence of Rationalization variable on fraudulent financial

reporting detection ...................................................................... 76

4.4.6 Influence of Succession of company manager variable on

fraudulent financial reporting detection. ..................................... 77

4.4.7 Influence of Dualism positioning in office on fraudulent

financial reporting detection ....................................................... 78

CHAPTER 5 CONCLUSIONS AND SUGGESTION ................................ 80

5.1 Conclusion ................................................................................................. 80

5.2 Implication ................................................................................................. 82

5.3 Limitation ................................................................................................... 83

5.4 Suggestion .................................................................................................. 84

BIBLIOGRAPHY .......................................................................................... 85

APPENDIX .................................................................................................... 90

xx

LIST OF TABLES

Table Page

Table 1.1 Fraud Cases in 2018 ......................................................................... 7

Table 4.1 Sample Details ................................................................................. 43

Table 4.2 Descriptive Statistic ......................................................................... 43

Table 4.3 ASX Descriptive Statistic ................................................................ 46

Table 4.4 IDX Descriptive Statistic ................................................................. 48

Table 4.5 MYX Descriptive Statistic ............................................................... 50

Table 4.6 PSE Descriptive Statistic ................................................................. 52

Table 4.7 SGX Descriptive Statistic ................................................................ 54

Table 4.8 Multicollinearities Detection............................................................ 58

Table 4.9 Autocorrelation Test ........................................................................ 59

Table 4.10 Model Significance Table .............................................................. 63

Table 4.11 Determinant Coefficient Test Result.............................................. 64

Table 4.12 Individual Parameter Test .............................................................. 65

Table 4.13 Hypothesis Result in General ......................................................... 68

Table 4.14 Hypothesis Result in All Countries ................................................ 69

xxi

LIST OF FIGURES

Figure Page

Figure 1.1 ACFE Survey of Fraud Practice in ASIA-Pacific .......................... 3

Figure 1.2 ACFE Survey on Fraud Perpetrators in ASIA-Pacific ................... 6

Figure 1.3 Fraud Cases Count in Asia Pacific Countries ................................. 8

Figure 2.1 Fraud Triangle Illustration .............................................................. 17

Figure 2.2 Fraud Diamond Illustration............................................................. 19

Figure 2.3 Fraud pentagon Theory Illustration ................................................ 21

Figure 2.4 Research Framework ...................................................................... 22

Figure 4.1 Normality Test ................................................................................ 57

Figure 4.6 Heteroskedastic Test ....................................................................... 60

xxii

LIST OF APPENDIXES

Appendix Page

1. Data Sample List .......................................................................................... 91

1.1. Australian Data Sample List ..................................................................... 91

1.2. Indonesian Data Sample List .................................................................... 91

1.3. Malaysian Data Sample List ..................................................................... 92

1.4. Philippine Data Sample List...................................................................... 93

1.5. Singapore Data Sample List ...................................................................... 93

2. Descriptive Statistics .................................................................................... 94

2.1. Australian Stock Exchange Descriptive Test Result ................................. 94

2.2. Indonesian Stock Exchange Descriptive Test Result ................................ 94

2.3. Malaysian Stock Exchange Descriptive Statistics .................................... 95

2.4. Philippine Stock Exchange Descriptive Statistics..................................... 95

2.5. Singaporean Stock Exchange Descriptive Statistics ................................. 95

3. Classic Assumption Test Result ................................................................... 96

3.1. Normality Test Result ............................................................................... 96

3.1.1. Australian Stock Exchange Normality Data Test Result ....................... 96

3.1.2. Indonesian Stock Exchange Normality Data Test Result ...................... 96

3.1.3. Malaysian Stock Exchange Normality Data Test Result ....................... 97

3.1.4. Philippine Stock Exchange Normality Data Test Result ....................... 97

3.1.5. Singapore Stock Exchange Normality Data Test Result........................ 98

3.2. Multicollinearities Test Result .................................................................. 98

3.2.1. Australian Stock Exchange Multicollinearities Test Result................... 98

3.2.2. Indonesia Stock Exchange Multicollinearities Test Result .................... 99

3.2.3. Malaysia Stock Exchange Multicollinearities Test Result..................... 99

3.2.4. Philippine Stock Exchange Multicollinearities Test Result ................... 100

3.2.5. Singapore Stock Exchange Multicollinearities Test Result ................... 100

3.3. Autocorrelation Test Result ...................................................................... 101

3.3.1. Australia Stock Exchange Autocorrelation Test Result ......................... 101

3.3.2. Indonesian Stock Exchange Autocorrelation Test Result ...................... 101

3.3.3. Malaysian Stock Exchange Autocorrelation Test Result ....................... 102

3.3.4. Philippine Stock Exchange Autocorrelation Test Result ....................... 102

3.3.5. Singapore Stock Exchange Autocorrelation Test Result ....................... 103

3.4. Heteroscedasticities Test Result ................................................................ 103

3.4.1. Australian Heteroscedasticity Test Result ............................................. 103

3.4.2. Indonesia Heteroscedasticity Test Result............................................... 104

3.4.3. Malaysia Heteroscedasticity Test Result ............................................... 104

3.4.4. Philippine Heteroscedasticity Test Result .............................................. 105

3.4.5. Singapore Heteroscedasticity Test Result .............................................. 105

xxiii

4. Hypothesis Test Result ................................................................................. 105

4.1. Model Significance Test Result ................................................................ 105

4.1.1. Australian Stock Exchange Model Significance Test Result ................. 105

4.1.2. Indonesian Stock Exchange Model Significance Test Result ................ 106

4.1.3. Malaysian Stock Exchange Model Significance Test Result ................. 106

4.1.4. Philippine Stock Exchange Model Significance Test Result ................. 106

4.1.5. Singapore Stock Exchange Model Significance Test Result ................. 106

4.2. Determinant Coefficient Test Result ......................................................... 107

4.2.1. Australian Stock Exchange Determinant Coefficient Test Result ......... 107

4.2.2. Indonesian Stock Exchange Determinant Coefficient Test Result ........ 107

4.2.3. Malaysian Stock Exchange Determinant Coefficient Test Result ......... 107

4.2.4. Philippine Stock Exchange Determinant Coefficient Test Result ......... 107

4.2.5. Singapore Stock Exchange Determinant Coefficient Test Result.......... 107

4.3. Individual Test Result Parameters ............................................................ 108

4.3.1. Australian Stock Exchange Individual Parameter Test Result .............. 108

4.3.2. Indonesian Stock Exchange Individual Parameter Test Result.............. 108

4.3.3. Malaysian Stock Exchange Individual Parameter Test Result .............. 109

4.3.4. Philippine Stock Exchange Individual Parameter Test Result ............... 109

4.3.5. Singapore Stock Exchange Individual Parameter Test Result ............... 109

5. Variable Data ............................................................................................... 110

5.1. Australian Stock Exchange Data ............................................................... 110

5.2. Indonesian Stock Exchange Data .............................................................. 114

5.3. Malaysian Stock Exchange Data ............................................................... 125

5.4. Philippine Stock Exchange Data ............................................................... 128

5.5. Singapore Stock Exchange Data ............................................................... 131

1. INTRODUCTION

1.1. Background

The financial statements are the result of a series of processes and financial

performance within a specific period of time. The development of financial

statements uses financial accounting reference rules in order to allow each report

to be understood and compared to other financial reports of the company. Good

financial report must present relevant data and understandable by any

stakeholders. Due to the large number of stakeholders’ manager obligated to the

financial report with the help of an independent auditor in favor of maintaining

the relevance and appropriateness of the financial statements and avoiding the

practice of fraud. The term fraud already very long known among auditors. The

practice of fraud that occurs not only operates in a case of corruption, but there are

also other fraud practices that may occur in the body of both private organization

as well as government such as collusion and nepotism. The practice of fraud in the

organization destined to benefit one side of party by taking the loophole/weakness

of the existing system within the company.

One of the fraudulent practices of financial reporting that has been very well

known in the world is the ENRON company scandal involving the office of 3

well-known public accountants namely Arthur Andersen LLP. In 2002, the

company engaged in the energy industry manipulated financial statements by

2

recording company profits of US$ 600,000,000 when the company suffered a loss.

This is done by management solely so as not to lose investors. The company's

strategy to look good in the eyes of investors brought ENRON's own boomerang.

This case is exacerbated by dubious accounting practices and no audit

independence conducted by Arthur Andersen LLP against ENRON. This event

was forced to make Arthur Andersen LLP expelled from the big five and both

companies experienced a collapse.

It did not stop at the ENRON case, the fraudulent financial reporting case was

also able to attack a technology company that had been established for 140 years,

Toshiba Corporation. This case began to be revealed since July 2015, Toshiba

proved to have inflated profits of 151.8 billion-yen, equivalent to 1.22 billion

USD in five years. This is quite unfortunate by many parties, good corporate

governance, a well-established company's reputation is not enough to make

Toshiba-class companies really clean from fraud. The case of fraud experienced

by Toshiba affected the resignation of Toshiba CEO, Hisao Tanaka and two other

senior executives.

3

Some fraudulent financial reporting practices that have damaged the relationship

of trust between management and investors also occur in Indonesia. Based on a

survey conducted by the Association of Certified Fraud Examiner (ACFE) in

2018 showed practice of fraud not only occur in manufacturing companies. Other

sector which are Banking and Financial Service, Government and Public

Administration, Health Care, Education, Energy also have founding’s of this

Figure 1.1 ACFE Survey of Fraud Practice in ASIA-Pacific

Source: RTTN ACFE 2018

4

practice, furthermore the diagram (see Figure 1.1) showed some result of the

survey itself:

The survey results carried out by the Association of Certified Fraud Examiners

were also proven by banking and financial companies in Indonesia, which until

now are still vulnerable to contracting fraud cases. Fraud that occurs in the

financial and banking sectors in Indonesia is also nothing new. In 1997, Lippo

Bank reported that the company was in a state of loss with assets that were

smaller than the actual assets, (Tuanakotta, 2014). Reporting from kompas.com

(2012), in the 2011-2012 there were even more than 700 cases of crimes in

corruption caused by fraud and weak internal control of the company or

organization, one of the most popular cases that had been discussed for the

practice of accounting, especially banking accounting, was the case what

happened at Citibank which was done by a former Relationship Manager, Malinda

Dee. Malinda Dee was charged with committing a crime of embezzling customer

funds and money laundering worth IDR 16.63 billion.

Examples of fraud scandals in the Indonesian financial and banking sector which

until now have not been completely completed and are still being discussed are

the frauds that occurred at Century Bank that were reported also helped drag the

names of the executive ranks in Indonesia. Another example is a fraudulent case

carried out by finance company Sunprima Nusantara Pembiayaan (SNP) Finance,

which is part of the Columbia business, a retail network that offers purchases of

household goods by way of credit or installments. In Columbia operations, SNP is

the party that supports the financing of goods carried out by Columbia with

5

financing from debt securities or banking. In the multi-finance industry, SNP

Finance is a middleclass player with a total financing of 5 trillion rupiah per year.

The SNP Finance case began when there was a default on the Medium-Term

Notes (MTN) interest, this case led to speculation that the SNP financial

statements were misstated because the company was audited by the renowned

Public Accounting Firm Deloitte and get a good rating from PT Pefindo. Since

May 2018 PT SNP Finance has been subject to sanctions for freezing business

activities by the Financial Services Authority because PT SNPF has not submitted

information disclosure to creditors and holders of MTN. Understanding the

common characteristics of fraud offenders can help organizations improve their

ability to detect fraud and minimize their risk of loss. The following information

is based on the perpetrators in ACFE study of the Asia-Pacific region.

According to Association of Certified Fraud Examiners (ACFE,2018) surveys for

the Asian-Pacific area 41% percent for mid-level manager followed by Employees

Figure 1.2 ACFE Survey on Fraud Perpetrators in ASIA-Pacific


6

30% and Executive/Owner 26%, however, the Executive/Owner has a tendency to

fraud in large amounts of money with the median loss of one million dollar (see

figure 1.2). ACFE also examine the methods by which occupational fraudsters

perpetrate their schemes in Asia-Pacific Region. The Result consistently shown

that occupational fraud cases can be broken down into three broad categories. The

most common of these is asset misappropriation; 80% of cases in the Asia-Pacific

region involved the misappropriation of assets from the victim organization.

These cases also are the least costly, causing a median loss of USD 180,000. On

the other end of the spectrum in both frequency and median loss is financial

statement fraud. This category accounted for 13% of cases in the region and had a

median loss of USD 700,000. Corruption schemes fell in the middle in both

respects, occurring in 51% of cases and causing a median loss of USD 500,000.

Both the frequency and median loss of corruption in the Asia-Pacific region were

notably higher than was found in our global data, which highlights the particularly

high-risk corruption presents in this region.

7

The following are some cases that occurred in 2018:

Country Case Source

United States of

America

The SEC charges Theranos Inc.,

and its Founder and CEO

Elizabeth Holmes, with fraud

Vox.com

Denmark Danske Bank CEO quits in a

$234 billion money laundering

scandal

Cnbc.com

India Developments in the $2 billion

Punjab National Bank fraud case

Reuters.com

United States of

America

National Health Care Fraud

Takedown Results in Charges

Against 601 Individuals

Responsible for Over $2 Billion

in Fraud Losses

Justice.gov

Malaysia Former Malaysian prime minister

Najib Razak arrested by anti-

corruption agency

Independent.co.uk

Indonesia Doubts over audited reports SNP

Finance

Thejakartapost.com

Source: independent founding by the writer

An Ego from the Manager or Owner, Pressure from the Shareholder or Board of

Director are the key factor affecting fraud practices in a private or government

organization. Cris (2015) noted that fraud was based on three insignificant factors,

namely dishonesty, intentions, and benefits that harm others so that fraud in any

form would certainly harm one or part of the needs that contain interests.

CIPFA (2012) “Any intentional false representation, including failure to declare

information or abuse of position that is carried out to make gain, cause loss or

expose another to the risk of loss”. According to the data by ACFE (2018), China,

Australia, Indonesia, Philippines, Singapore, Malaysia, Hongkong, New Zealand,

Table 1.1 Fraud Cases in 2018

8

Taiwan, and Vietnam are the top ten countries (see figure 1.3) with the greatest

number of reported fraud cases.

Fraudulent Financial Reporting is a problem that cannot be underestimated. From

year to year cases of fraud are always found. On this issue, the role of the auditor's

profession is very much needed to detect as early as possible the existence of

fraud, so that it can prevent fraud and possibly a prolonged scandal. The auditor

must be able to consider the possibility of fraud from various perspectives, one

theory that is often used to assess fraud is the theory of fraud triangles (fraud

triangle) triggered by Cressey (1953). Cressey (1953) revealed that fraudulent

financial reporting occurred always followed by three conditions, namely

pressure, opportunity, and rationalization. As time goes by, the development of

the theory of fraud triangle continues to be raised by Cressey. The first

development was put forward by Wolfe and Hermanson in 2004 with fraud

Figure 1.3 Fraud Cases Count in Asia-Pasific Countries


9

diamond theory, in this theory adding a qualitative element which is believed to

have a significant influence on fraud, namely capability. It does not stop at the

fraud diamond theory alone, Crowe (2011) also helped perfect the theory coined

by Cressey. Crowe found a study that the element of arrogance also affected the

occurrence of fraud. The research presented by Crowe also included fraud triangle

theory and the element of competence in it, so that the model fraud found by

Crowe consisted of five indicator elements namely pressure, opportunity,

rationalization, competence, and arrogance. The theory presented by Crowe in

2011 was named the Pentagon theory Crowe's fraud.

This research is a study that applies Pentagon theory Crowe's fraud. This is done

because the theory is a renewable theory that has never been applied to examine

financial reporting fraud, especially in Indonesia, and indicators of fraud

described in Crowe's fraud pentagon theory are far more complete than similar

theories such as the theory of fraud triangle and diamond fraud. These elements in

the Pentagon theory Crowe’s fraud cannot be investigated so that they require

variable proxy. Proxies that can be used for this research include Pressure which

is proxied by, financial targets, financial stability, external pressure, and

institutional ownership. Opportunity that is proxied by ineffective monitoring and

the quality of external auditors; Rationalization proxied by change in auditor;

Capability that is proxied by the change of company directors; and Arrogance that

is proxied by how company’s CEO or owner have multiple position whether

inside or outside organization or company.

10

These five factors are indicated to be the trigger for an increase in fraud,

especially in recent years. The company's desire that the company's operational

activities are guaranteed a going concern by always looking good causes the

company to sometimes take a shortcut (illegal), namely by committing fraud. The

research was carried out because it was motivated by concerns about the

proliferation of fraudulent financial reporting cases in Indonesia and in other

countries. The financial sector was chosen because it was an industry sector that

was very susceptible to fraudulent cases, as well as very little research conducted

to explore and disclose this case, especially with using Crowe’s fraud pentagon

theory. For these reasons, this study was conducted to further examine the

capabilities of Crowe fraud pentagon theory in evaluating and helping to detect

trends in the emergence of fraudulent financial reporting in the banking sector.

Based on that reason this research take title of: “FRAUDULENT FINANCIAL

STATEMENT DETECTION WITH FRAUD PENTAGON ANALYSIS IN

BANKING COMPANIES IN FIVE ASIA-PACIFIC COUNTRIES”

1.2. Formulation of Problem

Based on the description described above, the formulation of the issues That arise

in this research are follows:

1. Are financial targets influential in detecting fraudulent financial reporting?

2. Is financial stability influential in detecting fraudulent financial reporting?

3. Is external pressure influential in detecting fraudulent financial reporting?

4. Is monitoring ineffective influential in detecting fraudulent financial reporting?

5. Does rationalization have an effect on detecting fraudulent financial reporting?

11

6. Does the change of directors of the company have an effect in detecting

fraudulent financial reporting?

7. Is the CEO or president arrogance are influential companies in detecting

financial fraudulent reporting?

1.3. Research Purpose

To Discover the Influence of:

1. Financial target variable towards fraudulent financial reporting detection.

2. Financial stability variable towards fraudulent financial reporting detection.

3. External pressure variable towards fraudulent financial reporting detection.

4. Ineffective monitoring Variable towards fraudulent financial reporting

detection.

5. Rationalization variable towards fraudulent financial reporting detection.

6. Succession of company manager variable towards fraudulent financial

reporting detection.

7. Dualism positioning in office towards fraudulent financial reporting

detection.

1.4. Research Benefit Benchmark

This research aims to provide information and results from influence of Elements

of Pentagon theory consisting of: pressure, Opportunity, competence,

rationalization, arrogance towards fraudulent financial information. As well as

the stages necessary to know the practices of fraudulent in financial reporting.

As described this research might help:

12

1. For Science and Education

This Research is Expected to be used as a for deepening research to examine

the influence of pentagon theory towards fraudulent financial information

2. For Enterprises

To give board manager a brief overview about the impact of fraudulent

financial reporting in the long run and encouraging them to work with dignity

and responsibility to prevent the fraud practice and securing the name of the

company clean.

3. For Investors

To give reference and information in order to detect fraudulent financial

reporting early as possible in the decision making.

4. For Creditor

As a basis for making decisions in providing loans to companies and to assess

the possibility of a company being able to pay it off.

5. For the Community

To inform the community about the impact of fraudulent financial reporting

and way to detect it.

1.

2. LITERATURE REVIEW.

2.1. Theoretical Basis

2.1.1. Agency Theory

Agency theory is the relationship between management and the shareholders in

carrying out a common goal. According to Jensen and Meckling (1976) explain

agency relationships as “agency relationship as a contract under which one or

more person (the principals) engage another person (the agent) to perform some

service on their behalf which involves delegating some decision-making authority

to the agent”. Agency theory creates relationships between shareholders as

principals and company managers as agents who share their own interests.

Management is given part of the power to make decisions for the best interests of

shareholders. Therefore, managers must be accountable to shareholders. The unit

of analysis used in agency theory is a contract that underlies the relationship

between the principal and the agent. The focus is the determination of the most

efficient contract that underlies the agent and principal relationship.

According to Eisenhardt (1989) dividing three types of assumptions of basic

human nature to explain agency theory, namely:

1. humans are generally selfish,

2. humans have limited thinking power about the perception of the future

(bounded rationality), and

14

3. humans always avoid risk (risk averse). Based on the assumption of human

nature, managers as human beings are likely to act based on opportunistic

nature. The purpose of opportunistic nature is that managers will prioritize

their personal interests over the interests of others (investors). Agents will try

to find their own profits to get bonuses from the company in various ways

such as fraudulent financial reporting.

According to Eisenhardt (1989) agency theory is used to overcome two problems

that occur in the agency relationship. The first agency problem that arises when

the principal and agent desires are contradictory and it is difficult for the principal

to verify whether the agent has done something right. Second, the division

problem in bearing the risks that arise where the principal and agent have a

different attitude towards risk. In the agency relationship there is a separation

between the owner (principal) and control (the agent). Where companies separate

management functions and ownership functions will result in the emergence of

differences of interests between managers and shareholders. This can occur

because managers do not participate in taking risks as a result of making wrong

decisions and cannot increase the value of the company.

2.1.2. Fraudulent Financial Reporting

Fraud is an extreme disservice to a Company. According to the Arens (2016: 310)

Fraudulent financial reporting are the following:

“Fraudulent financial reporting is an intentional misstatement or omission of

amounts or disclosure with the intent to deceive users”. Most cases of fraudulent

15

financial reporting involve the intentional misstatement of amounts not

disclosures. For example, WorldCom is reported to have capitalized as fixed asset,

billions of dollars that should have been expensed. Omission of amounts are less

common, but a company can overstate income by omitting account payable and

other liabilities. Although less frequent, several notable cases of fraudulent

financial reporting involved adequate disclosure. For example, a central issue in

the Enron case was whether the company had adequately disclosed obligations to

affiliates known as special purpose entities. According to Sarwoko (2005),

Fraudulent Financial Reporting is misstatement or an omission that happened

intentionally in the financial report.

The definition according to the Black’s Law Dictionary is:

1. A knowing the misrepresentation of material matter fact to induce another to

act to his or her detriment; it is usually a tort, but in some cases (esp. the

conduct is willful) it may be a crime,

2. A misrepresentation made recklessly without belief in its truth to induce

another person to act,

3. A tort arising from knowing misrepresentation, concealment of material fact,

or reckless misrepresentation made to induce another to act to his detriment.

According to the Constitution No. 31 of 1999 junto Law No. 20 of 2001 stated

that “perbuatan curang dan perbuatan yang merugikan keuangan negara

merupakan jenis-jenis tindak pidana korupsi.” Which categorized as act of

corruption.

16

According to Effendi (2006) there are 3 form factor that caused fraudulent

financial reporting which are:

1. Manipulation, falsification, alteration of financial statement records and

supporting documents on the financial statements presented.

2. A significance Misrepresentation or misinformation in a financial statement.

3. Misapplication from the accounting principle which related to the number of

values, classification, presentation and disclosure.

From that it can be concluded that fraud is an intentional activity with the aim of

benefiting one of the interested parties by manipulating, misrepresentating, or

changing information significantly with some classification and can induce

another by the act of detriment.

2.1.3. Triangle Theory

This triangle theory was created by one of the nation's foremost experts on the

sociology of crime who died on July 21 in Solvang, California, named Cressey in

1953. This theory is the first theory that explains the motive of someone

committing fraud. Cressey (1971) argued that white-collar crimes are motivated

by what he referred to as a ‘non-shareable problem’. A non-sharable problem

occurs when an individual is confronted with a problem or personal crisis and is

unable to share their problem with friends or colleagues because of the shame the

offender associates with the behavior and the consequential effects of legal or

social sanctions when the behavior is discovered. Financial distress, loss of status,

admission of fault or poor judgement, have the potential to create a non-shareable

problem begetting an individual to secretly resolve their problem by stealing to

17

avoid losing face. Cressey’s (1971) hypothesis later became known as the fraud

triangle (see Figure 2.1) in which researchers added to motivation (a non-

shareable problem) the notions of opportunity and rationalization to explain the

advent of fraud. Those three elements are:

1. Pressure

2. Opportunity

3. Rationalization

Pressure, or motivation, provides the incentive to commit fraud; opportunity

grants the means to follow through with the intention to commit fraud; and

rationalization helps the offender to deal with the cognitive dissonance associated

with their behavior. The fraud triangle, now adopted in common auditing

standards, provides a valuable framework and base guidance to analyze individual

fraudulent behavior in certain case or investigation by auditor.

Rationalization

Figure 2.1 Fraud Triangle Illustration

18

2.1.4. Diamond Theory

This theory is the second theory as a refinement of triangle theory discovered by

Wolfe and Hermanson in 2004. Wolfe &Hermanson (2004) expanded fraud

triangle by including fourth element ‘capability’ to form fraud diamond (see

figure 2.2) and stated that personal characteristics and ability play an important

role in explaining fraudulent behavior. Capability acts as a convertor of

opportunity into reality. Wolfe and Hermanson (2004) examine evidence that

suggests that many frauds, especially some of the multibillion-dollar ones, would

not have occurred without the perpetrator(s) having the right capabilities. As

described by the authors, opportunity opens the door to fraud, incentive and

rationalization draw the fraudster closer to the door, but the fraudster must have

the capability to recognize the opportunity to walk through that door to commit

the fraudulent act and conceal it. It involves power to take decisions, technical

knowledge and trust.

The largest frauds are committed by intelligent, experienced, and creative people

with a solid grasp of company controls and vulnerabilities. This knowledge is

used to leverage the person’s responsibility over or authorized access to systems

or assets. This type of person has a strong ego and great confidence that he/she

will not be detected, or he/sh.e believes that he/she could easily talk him/herself

out of trouble if caught. The essential traits thought necessary for committing

fraud, especially for large sums over long periods of time, include a combination

19

of intelligence, position, ego, and the ability to deal well with stress. The person’s

position or function within the organization may furnish the ability to create or

exploit an opportunity for fraud.

Wolf and Hermanson explain the four elements, namely:

1. Incentive

2. Rationalization

3. Opportunity

4. Capability

Using the four-element fraud diamond, a fraudster’s thought process might

proceed as follows:

1. Incentive: I want to, or have a need to, commit fraud.

2. Opportunity: There is a weakness in the system that the right person could

exploit. Fraud is possible.

3. Rationalization: I have convinced myself that this fraudulent behavior is

worth the risks.

4. Capability: I have the necessary traits and abilities to be the right person to

pull it off. I have recognized this particular fraud opportunity and can turn it

into reality.

Figure 2.2 Fraud Diamond Illustration

20

In the context of the Fraud Triangle, capability modifies the opportunity construct

by limiting opportunity to a small set of individuals thought to have the necessary

capability. Thus, capability likely affects the probability that an individual will be

able to exploit opportunities in the control environment of the organization

2.1.5. The Pentagon Theory

The Pentagon theory was proposed by Crowe Horwart in 2011, on this theory has

five elements from the expansion of the triangle theory (Cressey, 1953) the

addition of these two elements namely competence and arrogance. The

competencies described in the pentagon fraud theory have meaning which are

similar to capabilities / capabilities previously described in diamond fraud theory

by Wolfe and Hermanson in 2014. Competence/capability is the ability of

employees to ignore internal controls, develop strategies concealment, and control

the social situation for his personal benefit (Crowe, 2011). According to Crowe,

arrogance is an attitude of superiority over rights owned and felt that internal

control or company policy does not apply to him. so that fraudsters usually think

freely to commit fraud without fear of sanctions that will ensnare him.

Henceforth it be concluded that fraud can occur based on capability and

competency combined with arrogance from stakeholders such as the owner and

CEO, this is also combined with three other factors which have been previously

stated, resulting theory named as Fraud Pentagon Theory (see Figure 2.3) which

will be used in this research. The Committee of Sponsoring the Treadway

Commission Organization (COSO) has found that 70% of fraudsters have profiles

that combine pressure with arrogance or greed and 89% of fraud cases involved

21

by the CEO. Crowe also shows that there are five elements of arrogance from the

CEO's perspective, namely:

1. Large egos - CEOs are seen as “celebrities” rather than entrepreneurs;

2. They can avoid internal controls and not get stuck;

3. They have bully attitudes;

4. They practice an autocratic management style; and

5. Fear they will lose their position or status. This element of arrogance can

develop into an extreme arrogance of snobbery factors, which hides the

negative impact of his subordinates that can destroy a career or Company.

Rationalization

Figure 2.3 Fraud pentagon Theory Illustration

22

2.2. Research Framework

2.3. Hypothesis Development

2.3.1. Financial targets influence in detecting Fraudulent financial reporting.

The business profits achieved by the company from existing targets can be called

financial targets. Agency theory can explain the pressure gotten by management

to generate high profits in accordance with the wishes of the owner. The high

level of profits set by the company make the management does various ways to

make financial statements look good. Skousen et al. (2008) stated that Return on

total assets (ROA) is a measure of operational performance widely used to show

how efficiently assets have been used. Because management is the party

contracted by the principal to carry out its obligations, then the management

wants to show the company's performance as possible. Management does not

Fraudulent Financial Reporting

Pressure

- Financial Target (Ha1)

- Financial Stability (Ha2)

- External Pressure (Ha3)

Opportunity

- Ineffective monitoring (Ha4)

Rationalization

- Auditor Opinion (Ha5)

Capability/competence

- Succesion of Board Manager (Ha6)

Arrogance

- Dualism in office position (Ha7)

Figure 2.4 Research Framework

23

want to consider not being able to regulate and run the company because it will

affect the bonus / compensation to be received. ROA is often used in improving

manager performance and in determining bonuses, wage increases, and others.

According to Mafiana (2016) explained that ROA does have a significant effect

on fraudulent financial reporting, meaning the size of ROA does affect

management to commit fraudulent financial reporting. Some companies consider

it reasonable if the ROA is high, if the company is able to reach the target within

the company in one period. Nevertheless, in increasing its performance by

targeting higher ROA, it allows management to cheat financial statements in the

form of profit management. The actual ROA that has been achieved by the

company in the previous year becomes a benchmark for the company to achieve

the same target or even higher in the next year. The higher ROA that will be

achieved by the company makes the probability of fraudulent financial statements

higher. by that reason hypothesis can be formulated as:

Ha1. Financial targets have a positive effect on fraudulent financial reporting

2.3.2. The effect of Financial stability in detecting Fraudulent financial

reporting

Financial stability pressure is a condition that forces companies to display

financial stability. Management is often under pressure to manage the company so

that the company remains stable, because if a company is in a stable condition

then the value of the company will rise and will certainly be an attraction for

investors, creditors and other decision makers. The unstable condition of the

company puts pressure on the management because the company's poor

24

performance will hamper the company's flow and investment in the future. This

has triggered management to commit fraud in order to cover up poor conditions of

stability. This is in line with the opinion of Loebbecke et al. (1989), because

assets are company wealth, to attract investors, the total assets should always be in

good condition. Therefore, financial stability can be measured using the ratio of

changes in total assets (ACHANGE). By calculating the difference in the total

assets of the company in the current period with the previous period to the total

assets of the previous period. In the study of Skousen et. al. (2009) proved that the

greater the ratio of changes in total assets (ACHANGE) of a company, the

possibility of potential fraud in a company's financial statements is higher. This

study uses a sample of banking companies with the possibility of slow asset

growth compared to manufacturing companies like previous studies, therefore

researchers formulate the following hypothesis:

Ha2. Financial stability has a negative effect on fraudulent financial reporting

2.3.3. Effect of External pressure in detecting Fraudulent financial reporting

financial reporting

External pressure is a situation where the company gets pressure from parties

outside the company. To overcome this pressure companies need additional debt

or external financing sources to remain competitive, including research funding

and development or capital expenditures (Skousen et al., 2009),the way of

company obtained additional debt give another external pressure to the

management itself, what meant by this external pressure is excessive pressure for

management to meet the requirements or expectations of third parties. External

25

pressure is proxied by using a leverage ratio, which is the ratio between total debt

and total assets. To get loans from external parties, companies must be believed to

be able to repay loans that have been obtained. Dechow et al. (1996) argue that the

demand for external funding depends not only on how much money is generated

from operating and investment activities but also on funds already available in the

company. They show that the average capital expenditure for three years before

financial statement manipulation is a measure of the level of investment desired

during the period of financial report manipulation (Skousen et al., 2008).

Person (1999) states that greater leverage (LEV) can be associated with a greater

likelihood of violating a credit agreement and a lower ability to obtain additional

capital through a loan. The company management will feel pressured by the

increasingly large debt, because the credit risk will also be high, thus allowing

fraud. Therefore, companies must save themselves from such conditions in order

to remain able to repay loans.

This is supported by the opinion of Skousen et. al. (2009) that one of the pressures

that company management often experiences is the need to obtain additional debt

or external financing sources in order to remain competitive, including research

funding and development or capital expenditure. Research conducted by Skousen

et al. (2009) show that the percentage of total debt to total assets (LEV) has a

positive effect on fraudulent financial reporting. Based on the explanation, a

hypothesis can be formed:

Ha3. External pressure has a positive effect on fraudulent financial reporting

26

2.3.4. Effect of Ineffective monitoring in detecting Fraudulent financial

reporting

Agency relationship is a contract in which one or more people (shareholders)

involve another person (manager) to perform several services on their behalf that

involve the delegation of authority and take decisions in this case the company.

The relationship between the two parties in this case is a relationship with the

purpose of maximizing the usefulness, so there will be where the manager does

not always act in the best interests of the owner or shareholder. shareholders can

attract their interest by setting appropriate incentives for managers and by issuing

disposal costs designed to protect deviant activities from managers. In addition,

some parties will enter into contracts or agreements to guarantee that they will not

take certain actions for the company or to ensure that the company will receive

compensation and liability if the manager takes the action. However, it is not

possible for companies with no costs to ensure that agents will make optimal

decisions from the company's point of view.

Agency relations will occur if the principal employs someone else, in this case the

agent to carry out work that has been delegated by the principal. The agency

relationship can cause several problems because of the information asymmetry

between the principal and the agent. This information asymmetry can be a

loophole for fraud. To avoid fraud in the company, a supervisory unit that is able

to monitor the running of the company is needed.

Ineffective monitoring or ineffectiveness of supervision that occurs in companies,

opens opportunities for actors or perpetrator to manipulate financial statements.

This factor can be caused by a lack of internal and external supervisory boards,

27

independent commissioner, in addition to the poor internal control system where

multiple functions and bad authorization occurs. This statement is reinforced by

Sihombing (2014) the occurrence of fraudulent practices or Fraud is one of the

effects of weak supervision or monitoring so as to provide an opportunity for

agents or managers to behave deviant by doing earnings management. So, the

company must minimize the opportunities that exist by creating good supervision.

Widespread accounting scandals and fraud practices are one of the effects of weak

supervision by companies that have provided an opportunity for someone to act in

accordance with their personal interests. With ineffective supervision,

management will feel that it is not being watched closely and increasingly free to

find ways to maximize personal profit. Therefore, to prevent fraud, another party,

namely an independent board of commissioners is needed.

The board of commissioners is widely believed to play an important role

especially in monitoring top management (Gunarsih and Hartadi, 2002). With the

presence of an independent board of commissioners, it is hoped that company

supervision will be more effective and fraud or fraud practices can be minimized.

With the employment of a commissioner who has no relationship with

shareholders, directors, management or other internal parties, he will conduct

supervision more independently.

The research conducted by Dechow et al. (1996) who examined the relationship

between the composition of the board of commissioners and fraudulent financial

statements. The results of the study prove that fraud is more common in

companies that have fewer external board members. This statement is supported

28

by Putriasih's research (2016) that ineffective monitoring influences or can be

used to detect financial statement fraud. Likewise, with the results of research by

Skousen et. al. (2009) which states that the ineffectiveness of supervision is able

to predict the occurrence of fraudulent financial statements. On this basis, the

hypothesis is as follows:

Ha4. Ineffective monitoring has a positive effect on fraudulent financial

reporting

2.3.5. The effect of Rationalization in detecting Fraudulent financial

reporting

In psychology and logic, rationalization (also known as making excuses) is a

defense mechanism in which controversial behaviors or feelings are justified and

explained in a seemingly rational or logical manner to avoid the true explanation,

and are made consciously tolerable or even admirable and superior by plausible

means. It is also an informal fallacy of reasoning. Rationalization encourages

irrational or unacceptable behavior, motives, or feelings and often involves ad-hoc

hypothesizing. This process ranges from fully conscious (e.g. to present an

external defense against ridicule from others) to mostly unconscious (e.g. to create

a block against internal feelings of guilt or shame). People rationalize for various

reasons sometimes when we think we know ourselves better than we do.

Rationalization may differentiate the original deterministic explanation of the

behavior or feeling in question. In fraud activity rationalization is the assumption

that someone justifies his crime behavior, they consider themselves fit to get what

they want in their work even though it might be wrong. According to Vermer

(2003) to calculate the level of rationalization using accrual principles related to

29

management decision making and providing insight into rationalization in

financial reporting. This research is also supported by Skousen et al. (2008).

Yesiariani (2016) shows that rationalization has a positive effect on fraudulent

financial reporting.

Ha5. Rationalization has a positive effect on fraudulent financial reporting

2.3.6. The effect of changes in company directors in detecting Fraudulent

financial reporting

According to Wolfe and Hermanson (2004) in Sihombing (2014) investigating

capability as one of the fraud risk factors underlying the occurrence of fraud

concluded that changes in directors could indicate fraud. Changes to directors are

not always good for the company. Changes to directors can be a company effort to

improve the performance of previous directors by making changes to the

composition of the board of directors or the recruitment of new directors who are

considered more competent than the previous directors. While on the other hand,

the change of directors could be an attempt by the company to get rid of directors

who are considered aware of fraud committed by the company and changes in

directors are considered to require adaptation time so that initial performance is

not optimal.

Wolfe and Hermanson (2004) explain the characteristics related to capability in

fraudulent actions, namely capability such as: position / function, brains,

confidence / ego, coercion skills, effective lying and immunity to stress. Change

of directors is the transfer of authority from the old directors to the new directors

with the aim of improving the performance of previous management. Yesiariani's

research (2016) shows that the change of directors has no effect on fraudulent

30

financial reporting. Based on the description above, hypotheses can be arranged as

follows:

Ha6. Substitution of company directors has a negative effect on fraudulent

financial reporting.

2.3.7. The influence of the CEO or president who has dualism in the company

in detecting Fraudulent financial reporting

Dualism position is a condition where a director has another position both inside

and outside the company. In a small company or a small dualism entity becomes a

common practice that occurs, because the size of the company and entities that are

still relatively small is not possible to employ employees or managers in sufficient

numbers. for this reason, in a small company several positions are headed by one

person, in addition to efficiency, the effectiveness side is also a consideration for

small companies to practice dualism. because the workload that is not too much

allows someone to have two or more tasks and responsibilities.

But this will contradict along with the increasing size of the company, the size of

a large company will certainly take a lot of time and energy, besides that the risk

of fraud will increase due to the size of the company. Good company performance

should not have a relationship with multiple positions of directors. With the

existence of multiple positions this allows negative effects. For example, from

several multiple positions it encourages someone to do collusion and even

sacrifice the interests of shareholders.

In addition, members of the board of directors can be disrupted due to being too

busy and out of focus. The statement above is supported by the results of research

conducted by Oktavia (2017) which shows that CEOs who have dualism positions

31

have a significant influence in detecting fraudulent financial reporting. Likewise,

the research conducted by Zelin (2018) shows that the board of directors' multi-

position factors have a significant influence on fraudulent financial reporting. So

that the CEO assumes that the supervision carried out by the company will not

apply to him, this assumption that often occurs and can lead to fraud in

manipulating the financial statements of a company.

Ha7. The CEO or president who has dualism in the company has a positive

influence on fraudulent financial reporting.

1. 1.

2. 2.

3. RESEARCH METHOD

1. Background

2. Test

3 . Research M

3.1. Sample and Gathering Data

3.1.1. Population

The population in this study were all banking sector companies in 5 Asia-Pacific

countries listed on the Indonesia Stock Exchange (IDX), Singapore Exchange

(SGX), Bursa Malaysia (MYX), Australian Stock Exchange (ASX), Philippines

Stock Exchange (PSE) during the period 2013-2018. The reason why the

researchers chose these five countries is because according to a survey conducted

by ACFE and presented in the introductory chapter (see figure 1.3) , the top five

countries with the most findings are as follows China, Australia, Indonesia,

Philippines, and Singapore, but when an in-depth investigation the researchers

found difficulties in getting information for one country namely China so that

researchers decided to replace the sample with Malaysia as the sixth country .the

sampling method in this study used a purposive sampling method, with the

following criteria:

1. Banking sector companies that have gone public or listed on the Stock

Exchange in their respective countries during the period 2013-2018.

2. The company publishes audited annual financial reports on the Stock

Exchange website of each country during the period 2013-2018.

33

3. Data regarding data relating to research variables is available in full (overall

data is available in publications during the period 2013-2018).

4. Banking that presents clear readable financial statements

5. Banking that provides financial reports in annual reports

3.2. Data types and sources

The data used in this research is secondary data. Where the data is obtained from

the banking sector companies listed on the Stock Exchange 5 of the Asia-Pacific

country during the period 2013-2018, for the country of Indonesia using Indonesia

Stock Exchange index (IDX), Singapore using Singapore Exchange index (SGX),

Malaysia using Bursa Malaysia but Researcher using Malaysian Stock Exchange

as Code name in this research (MYX), Australia using Australian Stock Exchange

Index (ASX), Philippine Stock Exchange index (PSE).

3.3. Research Variable

According to Hatch & Farhady (1981). Variables are defined as attributes of a

person or object that has variations between one person and another or one object

with another object. In this study using two variables, namely the dependent

variable and the independent variable to determine the research, furthermore the

independent variable will be expanded to many variable.

34

3.3.1. Dependent Variable

Because this research focused on intentional fraud, researcher decide to use

earning management as the dependent variable then it will proxied and measured

using Discretionary accrual (DACC) thus can calculated in the following way:

DACCit = TACCit / Ait-1 - NDACCit

Where:

DACCit = company discretionary accrual i in year t

TACCit = total company accrual i in year t

NDACCit = nondiscretionary accrual company i in year t

Ait-1 = total company assets in year t-1

To measure discretionary accruals, first calculate the total accruals for each

company i in year t with the modified formula Jones (1991) Dechow et al. (1995)

namely:

TACCit = Net Profit - Operational Cash Flow

The total accrual value (TACC) is estimated by the regression equation as

follows:

TACCit / Ait-1 = α1 (1 / Ait-1) + α2 [(ΔREVit) / Ait-1] + α3 (PPEit / Ait-1) +

εit

Where:

Ait-1 = total company assets in year t-1

Δ REVit = revenue in year t minus revenue in year t - divided by total

assets in year t-1

PPEit = total fixed assets in year t divided by total assets in year t-1

εit = error

35

By using the regression coefficient above, the value of non-discretionary accrual

(NDACC) can be calculated by the formula:

NDACCit = α1 (1 / Ait-1) + α2 [(ΔREVit-ΔRECit)] + α3 (PPEit)

Where:

Δ RECit = Net receivable at year t is reduced net receivables at year t-1

divided by total assets in year t-1

ΔREVit = revenue in year t minus revenue in year t-1 divided by total

assets year t-1

a1, a2, a3 = coefficient values obtained from regression results

3.3.2. Independent variable Measurement

1. Financial Target

ROA = 𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕

𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕

2. Financial Stability

ACHANGE = 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒕− 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒕−𝟏

𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒕

3. External Pressure

Lev = 𝑻𝒐𝒕𝒂𝒍 𝒐𝒇 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒚

𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

4. Ineffective Monitoring

BDOUT= 𝑻𝒐𝒕𝒂𝒍 𝑰𝒏𝒅𝒆𝒑𝒆𝒏𝒅𝒆𝒏𝒕 𝑪𝒐𝒎𝒎𝒊𝒔𝒊𝒐𝒏𝒆𝒓

𝑻𝒐𝒕𝒂𝒍 𝒐𝒇 𝑩𝒐𝒂𝒓𝒅 𝑪𝒐𝒎𝒎𝒊𝒔𝒊𝒐𝒏𝒆𝒓

5. Rationalization

Dummy variable for auditing opinion where unqualified opinions

without exception with values 1 and 0 for other opinions

6. Change Director

This research focus on fraud happen after the change of Director

Dummy variable will be used, code 1 if there is a change of directors

in the company, within two fiscal years and vice versa if there are no

Directors change then given a code 0

36

7. Dualism Position

Dummy variable, if CEO or president who has a dualism position in

the company then give value of 1 if dualism not happen value is 0

3.4. Analysis methods

The analytical method is used to process and provide results with multiple linear

regression methods.

3.4.1. Descriptive statistics

Descriptive statistics relate to methods of grouping, summarizing, and presenting

data in more informative ways (Santosa, 2005). Descriptive analysis is intended to

describe or describe data from variables. Statistical data uses descriptive statistical

tables using minimum values, maximum values, mean values, and standard

deviations. The mean is a group explanation technique based on the average value

of the sample. The large standard deviation of the difference from the sample

value to the average, the sample value is a bit of the total number of objects

observed. The maximum and minimum to see the maximum and minimum values

of a sample. The data above is used to illustrate that the sample meets the

requirements to be used as research samples.

3.4.2. A classic assumption test

Classical assumption tests must be conducted to test the assumptions that exist in

multiple linear regression modeling. This test consists of normality tests,

multicollinearity, autocoleration, and heteroscedasticity

37

3.4.2.1. Normal test

According to Ghozali (2006), the normality test aims to test whether in the

regression model, independent variables and dependent variables both have a

normal distribution or not. Statistical tests are carried out by making a hypothesis:

1. If the value of Asymp. Sig. (2-tailed) <0.05 then Ha0 is rejected. This means

that residual data is not normally distributed.

2. If the value of Asymp. Sig. (2-tailed)> 0.05 then Ha0 is not rejected. This

means that residual data is normally distributed.

3.4.2.2. Multicollinearities Test

Multicollinearity test aims to test whether the regression model found a

correlation between independent or independent variables. A good regression

model should not occur correlation between independent variables (Ghozali,

2013). One to find out whether or not there is multicollinearity is to use Variance

Inflation Factor (VIF) and Tolerance. Both of these measurements indicate which

of each independent variable is explained by other independent variables.

Tolerance measures the variability of selected independent variables that are not

explained by other independent variables. So a low tolerance value equals a high

VIF value (because VIF = 1 / Tolerance). The criteria for decision making with

tolerance and VIF values are as follows:

a) If the tolerance value is ≥ 0.10 or the VIF value ≤ 10, it means there is no

multicollinearity.

b) If the tolerance value ≤ 0.10 or VIF value ≥ 10, it means that there is

multicollinearity.

38

3.4.2.3. Autocorrelation test

According to Ghozali (2013) the autocorrelation test aims to test whether in the

linear regression model there is a correlation between the confounding errors in

period t and the interfering errors in the t-1 period (before). Autocorrelation arises

because sequential observations throughout the year are related to each other. This

problem arises because the residuals are not free from one observation to another

(Sihombing, 2014). Run test will be used for the auto correlation test, Run test of

randomness is basically based on the run. Run is basically a sequence of one

symbol such as + or -. Run test of randomness assumes that the mean and variance

are constant and the probability is independent.To detect autocorrelation with the

Run Test with the criteria:

1. If the sig. value is greater than 0,05 (>5%) then there is no autocorrelation.

2. If the sig. value is smaller than 0,05 (<5%) then there is positive

autocorrelation.

3.4.2.4. Heteroskedastic Test

The heteroscedasticity test aims to test whether in the regression model variance

inequality occurs from residuals to observations of other observations. If the

residual variance from one observation to another observation remains, then it is

called homoskedasticity and if it is different it is called heteroscedasticity

(Ghozali, 2013). A good regression model is experiencing homoscedasticity or

heteroscedasticity does not occur (Ghozali, 2013). Heteroscedasticity testing can

be done by looking at statistical tests.

39

The statistical test used in this study to determine whether heteroscedasticity is

available is a glejser test and a park test. If the results of the glejser test show a

significance value exceeding 0.05 then it is declared free of heteroscedasticity

(Ghozali, 2013).

3.4.3. Hypothesis Test

Hypothesis testing is done to get the results of data analysis that is valid and

supports the hypothesis stated in this study. Hypothesis testing is carried out with

the following stages:

1. Determine the financial statements that are the object of research.

2. Calculate the proxy of each variable according to the measurement method

described.

3. Perform multiple linear regression tests on the model with the steps

described above (Sihombing, 2014)

This study uses SPSS Version 25 Software to determine the relationship between

variables and dependent variables. The regression model used to determine the

relationship between discretionary accruals and Pentagon Fraud proxies is:

DACCit = ß0 + ß1X1 + ß2X2 + ß3X3 + ß4X4 +

ß5X5 + ß6X6 + ß7X7 + ε

Information:

ß0 = constant

X1 = ROA (Return on Assets)

X2 = ACHANGE (ratio of changes in total assets)

X3 = LEV (ratio of total liabilities per total asset)

40

X4 = BDOUT (ratio of independent board of commissioners)

X5 = AUDREPORT (auditor opinion ratio)

X6 = DCHANGE (change of board of directors in the company)

X7 = CEO (Dualism in the managerial position of the CEO or president)

ε = error

3.4.3.1. Determination Coefficient

The Coefficient of Determination (R2) essentially measures how far the ability of

the model in explaining variations in the independent variable (Ghozali, 2011).

The value of determination coefficient is between zero and one. The small value

of R2 means that the ability of independent variables to explain variations in the

dependent variable is very limited. Values that approach one means that the

independent variables provide almost all the information needed to predict

variations in the independent variable (Ghozali, 2013).

3.4.3.2. Model Significance Test

The F statistic test basically shows whether all the independent or free variables

included in the model have a joint effect on the dependent variable (Ghozali,

2011). To test this hypothesis F statistics are used with the following decision-

making criteria:

1. If the value of F <0.05 then H0 is rejected. This means that all independent

variables simultaneously and significantly affect the dependent variable.

2. If the value of F> 0.05 then H0 is not rejected. This means that all independent

variables simultaneously and significantly do not affect the dependent variable.

41

3.4.3.3. Individual Parameter Test

The t statistic test basically shows how far the influence of one explanatory

variable / independent individually in explaining the variation of the dependent

variable (Ghozali, 2011). If the significance value is <0.05 or 5% and compares

the value of t count with t table, if the value of t count> value of t table then an

independent variable individually affects the dependent variable (Ghozali, 2013).

5. CONCLUSIONS AND SUGGESTION

5.1 Conclusion

This study aims to prove empirically about the influence of Pressure (Financial

Targets, Financial Stability, and External Pressure), Opportunity (Ineffective

Supervision), Rationalization (Change of Auditors), Capability / Competency

(Change of Directors), and Arrogance (Dualism of Position) towards fraudulent

financial statements in banking companies5 ASEAN countries listed on the

Australian Stock Exchange (ASX), the Indonesia Stock Exchange (BEI), the

Malaysian Stock Exchange (MYX), the Philippine Stock Exchange (PSE), and the

Singapore Exchange (SGX) ) during the 2013-2018 period, then the following

conclusions can be drawn:

1. From five countries only Indonesia, and Australia whose Financial target

variable (financial target) has a significant positive effect on financial

statement fraud. The results support first hypothesis (Ha1) which states that

financial targets have a positive effect on financial statement fraud. This

means that the greater the value of the financial target, the potential for

financial statement fraud is increasing.

2. From five countries, three of them have have support the second hypothesis

(Ha2) which states that financial stability has a positive effect on financial

81

statement fraud. This means that the greater the value of financial stability,

the potential for fraudulent financial statements decreases.

3. Form five countries two of them Australia and Malaysia support third

hypothesis 3 (Ha3) which states that external pressures have a positive effect

on financial statement fraud. This means that the greater or less the value of

external pressure will affect the potential for fraudulent financial statements.

4. The ineffective monitoring variable does have insignificant affect to the

financial statement fraud in five countries. The results of this study do not

support fourth hypothesis (Ha4) which states that the ineffectiveness of

supervision has a positive effect on financial statement fraud. This means that

the greater or less the value of ineffective supervision will not affect the

potential for fraudulent financial statements.

5. Variable influence Rationalization in all countries of five don’t have any

effect on financial statement fraud. The results of this study do not support

and contradict with fifth hypothesis (Ha5) which states that rationalization has

a positive effect on financial statement fraud. This means that the greater or

less the value of rationalization, it will not affect the potential for fraudulent

financial statements.

6. The change in director’s variable does not affect the financial statement fraud.

The results of this study do not support the sixth hypothesis (Ha6) which

states that the change of directors has a negative effect on financial statement

fraud. This means that the greater or lesser the value of the change of

directors will not affect the potential for fraudulent financial statements.

7. The dualism position variable (dualism position) does not affect the financial

statement fraud in Indonesia, Philippine, and Singapore. The results of this

82

study do not support the seventh hypothesis (Ha7) which states that dualism

of office has a positive effect on financial statement fraud. This means that

the greater or less the value of dualism will not affect the potential for

fraudulent financial statements.

5.2 Implication

The implications of the results of this study are mainly on financial target

variables and financial stability variables which have been shown to have a

significant positive and negative effect on financial statement fraud. From the

results of this study are expected to provide benefits to users of financial

statements, especially in property companies, real estate, and building

construction, one of which is to consider management as responsible and agents in

protecting shareholders. In addition, investors can be used as a tool to provide

information to be more careful in considering investment. For creditors as a

material consideration when giving credit or loans to companies. The users of

financial statements can use the financial target variable and financial stability to

detect whether the company has the potential for financial statement fraud, so that

it can be used for the right decision making.

83

5.3 Limitation

This study has several limitations faced, namely:

1. There is lack of variable variation, so the ability of variables to describe the

model is very minimal.

2. There are companies that do not display their financial statements, there are

also companies that do not display some of the reference information of the

required variables clearly so as to reduce some of the samples.

3. There are differences in the format of financial statements and account names

in Australia, Singapore, the Philippines and Malaysia.

4. There are differences in Banking Regulation between each country that

researcher didn’t include.

5. This research focus on intended fraud, and fraud that happen after company

change of Director.

6. There are difficulties, especially data transparency and access to search data

starting from the name of the company along with financial reports in

Australia, Singapore, the Philippines and Malaysia, for Indonesia, there are

restrictions on access to data for the previous financial statements.

7. In the study, researchers encountered difficulties, especially in defining, and

justifying whether the company in the sample has a dualism system in the

management of the company. Because many financial reports do not describe

or provide information.

84

5.4 Suggestion

Based on the discussion and conclusions obtained, the following are suggestions

that researchers can submit for further research:

1. Future studies use dependent and independent variables that are simpler and

easier to find in financial statements.

2. Until now there is still very little research on fraud in financial reporting.

Future studies are expected to be able to examine more broadly in the most

numerous sectors on the exchange

3. For further research is expected to use a broader research object so that it can

generalize research results for all companies listed on the IDX.

4. It is hoped that researchers will be able to add proxy variables from pentagon

fraud such as institutional share ownership, external auditor size, auditor

turnover, personal financial need and capital turnover so that the scope of the

research variable becomes wider.

85

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