Factors Affecting Financial Statement Fraud : Fraud Triangle … · 2018-12-07 · ng financial...

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Fakultas Ekonomika dan Bisnis

Universitas Kristen Satya Wacana

3rd Economics & Business Research Festival

13 November 2014

FACTORS AFFECTING FINANCIAL STATEMENT FRAUD:

FRAUD TRIANGLE APPROACH

Evta Oktaviani

Golrida Karyawati

Nurruzahman Arsyad

Sampoerna School of Business

ABSTRACT

This study aims to obtain empirical evidence about relationship of fraud triangle with financial

statement fraud. Fraud triangle theory explains that pressure, opportunity, and rationalization

are always present in fraud situations. The variables of fraudrisk factor for pressure are using

proxy financial stability; sales growth (SGROW), asset growth (AGROW), and cash flow to

earnings growth (NICFOTA), financial security that proxy by account receivable turnover

(SALAR) and asset turnover (SALTA), external pressure that proxy by leverage (LEV), financial

targets proxy by return on asset (ROA).

Variables for opportunity used are ineffective monitoring proxy by independent board members

(BOUTP), board members on audit committee over board size (AUDCSIZE), and independent

audit committee (IND). Variables for rationalization are using managements’ control proxy

which represent by auditor opinion (AUDREPORT). Financial statement fraud is representing

by a proxy of earning management. Earnings management as measured by discretionary

accruals estimated using the modified Jones model (1991). The population of this research is

133 manufacturing companies listed on Indonesia Stock Exchange (IDX) in 2011 and 2012.

Data analysis was performed through classical assumption and hypothesis testing using linear

regression.

The result of this research indicates that all variables which represent opportunity, pressure,

and rationalizations have significant association with financial statement fraud. Association of

asset growth, sales growth, return on asset, board members on audit committee over board

size, and independent audit committee are supported previous research. Moreover other factor

asset turnover, receivable turnover, operating cash flow indicator, leverage, independent

board, and auditor opinion contradicts previous study supported by constructive reason of

practice.

Keywords: Fraudulent financial statement, fraud triangle, fraud risk factor, financial stability,

financial security, external pressure, financial target, ineffective monitoring, earning

management, discretionary accruals.

INTRODUCTION

Background

Fraud cases caused worse impact to economy world widely. One of the biggest case is

the case involving world's giant energy company, Enron in 2002. Fraud committed by the

company resulted in losses $ 50 billion, investor suffer loss $ 32 billion and thousands of

employees of Enron losed their pension fund about $ 1 billion.

Currently number of fraud cases has increase worldwide. KPMG's 2012 survey found

that $373 million was stolen over the past two years and the average value of fraud loss is more

than $3 million (KPMG Forensic, 2012).

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Extensive studies conducted by Association of Certified Fraud Examiner (ACFE shows

that Indonesia position in terms of number fraud cases occurs compare to other Southeast Asia

country as shown on figure 1.1

Association of Certified Fraud Examiner (ACFE,2012) classified occupational fraud

into corruption, asset misappropriation, and fraudulent statement. From those typesit was

founded that financial statement fraud is the most costly form of occupational fraud which cause

median loss in 2012 as much as $1 million compares to corruption caused by asset

misappropriation which are $250,000, and loss caused by corruption $120,000 as drawn by

figure 1.2

Figure 1.2 shows that financial statement fraud has cause a lot of losses. Financial

statement fraud has become the highest one compare to other types. Fraud in financial reporting

become main concern of many parties because financial report is important instrument

especially for external parties in analysing the performance of company. If financial report is

manipulated, it will lead users of financial statement take wrong decision on their investment.

This financial statement fraud is very interesting and worth studying.

Financial losses caused by financial statement fraud bring professionals taking

initiative in analyzing motivation of perpetrators to engage in fraud acts. One of

thoseresearchers is Dr. Donald Cressey in 1953.His finding about motivation of committing

fraud has been recognized widely anddeveloped into a theory called as Fraud Triangle Theory.

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Cressey’s theory has been adopted by government of United States in designing

regulation to increase the effectiveness of auditor in detecting fraud, which in SAS 99 stated

as fraud risk factor (Skousen, 2009). According to Cressey there are three factors must be

present for fraud to occur which are pressure, opportunity, and rationalization.

Pressure occurs when employee cannot achieve or solve the problem what they

supposed to do. Opportunity referred to how person able to do fraud. It’s matter of ways of

committing fraud. Lastly, Rationalization is referring how fraudster rationalizes his action

before his engage in fraud.

Fraud triangle theory introduced has widely used in detecting motivation of perpetrator

engage in financial statement fraud. Researchers who used this fraud triangle theory in

theirresearch areSkousen and Wright in 2006 and 2009. In Indonesia, similar works has been

done by EmaKurniawati (2012) where she used restatement as proxy for financial statement

fraud with used sixths independent variables derived from fraud triangle.

Research Problem

Motivation of fraud represent by Cressey’s fraud triangle theory has used by many

researcher to detect the likelihood of financial statement fraud. Representative proxy developed

from each component of fraud triangle expected to investigate and reduce financial statement

fraud practices. This research will answer this question: Does Pressure, Opportunity, and

Rationalization affect the tendency of financial statement fraud behavior in

LITERATURE REVIEW

Financial Statement Fraud

Beasley et al (1999) argued that financial statement fraud is more likely occurs in

companies which experiencing financial difficulties rather than normal companies. Beasley

divide financial statement fraud into two types. First, is the intention of management toisueor

to publish materially misleading financial statement .The second, is the occurrence of

misappropriations asset by top management like chairperson, vice chairperson, chief executive

officer, president, chief financial officer and treasurer.

Financial statement fraud mostly involveoverstatement company’srevenues and assets

(Beasley et al, 1999). Overstating revenuescan be done by recording fictitious sales and

relatedtransactions. Another practice of financial statement fraud is overstating assets by

overstating inventory, property, plant, equipment, and other tangible assets while actually those

assets did not exist.

Earning Management

Earning management is considered as “window dressing “action undertaken by

manager to increase firm’s reported accounting earnings which has no impact on company’s

real cash flow and economic earning ( Dutta and Gigler , 2002). Earning management take

place when there is difference between reported earning with true earnings, while agent

dishonestly communicate the information for their personal gain.

Schipper (1989) in Nelson et al (2002) stated that earning management ispart of fraud

in which manager intentionally intervene financial reporting process to produce private gain”.

Rosenzweig and Fischer (1994) defined earning management as manager action that is

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intended to increase or decrease current reported earnings without generating a corresponding

increase or decrease in long term economic profitability.

Roubi and Richardson (1998) in Ahmad et al (2008) mentioned that “fraudulent

financial reporting relates the fraudulent acts with earning management activities.Earnings

management can be divided into opportunistic earnings management and efficient earnings

management. Siregar and Challen (2012) mentioned that “opportunistic earnings management

will lower the quality of earnings reported by management. Investors will not appreciate lower

quality of earnings announced”. Efficient earnings management according to Siregar et al.,

(2008) is whenthe earnings management focuss onenhancing informational content of earnings

and promote communication between managers, shareholders and the public.

Opportunistic earning management action is considered as fraud, such as when

management deliberately commit window dressing, misstating, and manipulating company’s

assets which affect financial statement. This action false the information and finnalyharm

stakeholders. Zhao and Chen (2008) stated that earnings management is proxy for financial

reporting fraud.

Fraud Triangle

Motivations in committing fraud are basically vary among perpetrators. Currently

Fraud Triangle Theory is mostly used in detecting motivation of people engage in fraud. This

theory is introduced by Dr. Donald R. Cressey, a criminologist who made research focus on

embezzlement behavior. Cressey (1953) found that there are three elements that drive people

in doing fraud which are pressure, opportunity, and rationalization as shown on figure 2.3.

Skousen and Wright (2008) found that pressure has significant impact on financial

statement fraud. Sales growth and asset growth (Bell et al., 1991), operating cash flow

(Albretch, 2002), account receivable turnover and total asset turnover (Albretch, 2002),

leverage (Defond and Jiambalvo, 1991), and Return on Asset (Summers and Sweeney, 1998)

are represent pressure.

Fraud relateto opportunity components can be measured through independent board

members (Beasley at al., 2000 &Dechow et al., 1996) ,composition of board members on audit

committee (beasley et a,,2000), and independent audit committee (abbot and parker,2001.

Lister (2007) suggested that rationalization is the hardest fraud condition to understand

and determine. Skousen et al. (2009) use auditor change and auditor opinion to measure

financial statement fraud

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Previous Study

Prior research concern in detecting financial statement fraud using fraud triangle has

been studied by many researchers. Research conducted by Skousen and Wright (2006) with

title “Contemporaneous Risk Factors and the Prediction of Financial Statement fraud” identifies

factors related to fraud. They examined set of factors which derived from fraud triangle

components and it’s linked to incident of financial statement fraud.

This research finds that the increasing in independent audit committee resulted in

financial statement fraud reducing. Further, is that holding more than 5% outstanding shares

increasing fraud occurrence. Another finding, is that the existing of audit committee will

increase the likelihood of fraud occurence. The decreasing amount of insider ownership

increase fraud tendency, while fraud significantly higher when both positions CEO and

chairman of board occupied by one person rather than the two different persons.

Further research done by Skousen, Smith, and Wright (2009) which examine

effectiveness of Cressey’s (1953) fraud risk factors adopted in SAS No. 99. This research aim

at detecting financial statement fraud. Skousen, Smith, and Wright (2009) developed proxies

to measure pressure, opportunity, and rationalization by using publicly available information

in financial report. This research found that pressure proxies and proxies for opportunity are

significant in detecting financial statement fraud.

Research conducted by Spathis (2002) examined published data to detect factors

associated with false financial statements (FFS) at manufacturing companies in Greece by using

ten financial variables; consist of inventories to sales ratio, the ratio of total debt to total assets,

the working capital to total assets ratio, the net profit to total assets ratio, and financial distress

(Z-score). Finding of his research shows that there is association between indicator use and

false financial statement, they are; high inventories with respect to sales, high debt to total

assets, low net profit to total assets, low working capital to total assets and low Z scores are

more likely to falsify financial statements.

Specifically Beasley (1996) researched relation between board of director composition

and financial statement fraud. Results in this study showthat the presence of audit committee is

not significantly affect likelihood financial statement fraud. While number of outside

directorship in other firms held by outside directorsdecreases, the likelihood financial statement

also decreases.

Related research continued by Spathis, Doumpos, and Zo-pounidis (2000) by detecting

associated with falsified financial statements using ten financial ratios. This study highlight

important financial ratios that can be helpful towards identification of falsifying financial

statement such as total debt to total assets ratio, inventories to sales ratio, net profit to sales ratio

and sales to total assets ratio.

Hypothesis

Pressure and Financial Statement Fraud

Previous research use financial stability, external pressure and financial targets to

define existence of pressure.

Rapid Asset Growth

Rapid growth in company’s assets associatewith the likelihood of financial statement

fraud (Beasley et al. 2000). So, that the hypothesis can be drawn as follows:

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H1: Asset Growth is positively related to likelihood financial statement fraud

Sales Growth

Company’s performance affects manager action in doing fraud. In condition where

companies experience slow performance shown by decrement in sales, managers will get

propensity to commit fraud by falsifying sales amount to make it as if grow or at least maintain

consistent growth. This relate with previous research conducted by summers and Sweeney

(1998) which stated that sales growth has high propensity of misleading.

H2: Sales growth is negatively related to financial statement fraud

Cash flow indicator ratios

Previous research conducted by Albrecht (cited in Skousen, 2006) argued

thatcompany’s financial stability become problem when management is not able to generate

positive cash flow from operation repeatedly. Managementinability to generate positive

operating cash flow will be align with earning growth. Negative operating cash flow also

reflects lower number of earning growth. This condition encourage management engaged in

fraud by manipulating cash flow statement,especially in operating cash flow to make it positive.

H3: Cash flow indicator is negatively associate with the likelihood of financial statement fraud

Receivable Turnover Ratio

Increase in account receivable will raise the likelihood of company to inflate the

revenue (Beneish, 1997). Sales dominated by account receivables rather than by cash increase

the possibility of management to manipulate and falsify the numbers of sales occurred in that

period.

Lower turnover ratio indicates that company is not able to collect its receivables

frequently and efficient. This condition encourages management to engage in fraud by lowering

account receivable and increasing number of cash sales. Increasing accounts receivable

turnover ratio, will reduce the likelihood financial statement fraud. Therefore negative

association between sales to account receivable create the probability of fraud. The hypothesis

derived is as follows:

H4: Receivable turnover ratio is negatively relate with the likelihood of financial statement

fraud

Asset turnover ratio

Sales to total assets is a measurement of capital turnover represent which how well

sales generating company’s asset. Sales to total asset are is to give information about

management’s ability in dealing with business competitiveness. Management of fraud firm has

different ability with management of non-fraud firm (Persons, 1996). Inability of management

to win the competitiveness in the business will encourage them to performed fraudulent

financial reporting. Fraud firm has lower sales to assets compare to non-fraud firms.

Hypothesis expected is as follows:

H5: sales to total assets is negatively relatewith likelihood financial statement fraud

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Leverage

Leverage is part of pressure factor that encourage management to engage in financial

statement fraud. The condition in which company facing lower performance will affect the

company ability to pay the debt and meets debt covenant. If firms cannot meet debt covenant

means that there will be reconstructing cost. To avoid this cost company have to have incentive

to overstate earnings. Manager will maintain variables related to covenant remain good,

because it will be evaluated by creditor and for sure this will affect the future opportunity to

borrow more money.

H6: Leverage is positively relate with likelihood financial statement fraud

Return on Asset

ROA also become the main indicator in determining bonus and salary increment. This

could motivate management to perform fraud when they cannot achieve the target. Higher in

return on asset values will increase the likelihood of fraud occuring. There will be difference

between ROA in fraud and no-fraud Company (Summers and Sweeney, 1998). That’s why

ROA is used to represent financial target that can lead to fraud in financial statement. The

hypothesis derived is as follows:

H7: Return on assets is positively associated to likelihood financial statement fraud

Opportunity and Financial Statement Fraud

Opportunity factor will be existed in the absent of effectivemonitoring within the firms.

Opportunity factor represented by three variables; independent board, audit committee size,

and independent audit committee.

Independent board members

Existence of board directors within an organization has important role in monitoring

top management action in running the company. This monitoring is including control over

violation action performed by management to avoid financial statement fraud.

Dunn (cited in Skousen et al. 2006) argued that fraud firms have fewer outside

members on their board of directors compare to non-fraud firms. The higher outside member

in directorship, the lower incident of fraud. The following hypothesis is as follows:

H8: Independent board members is negatively relate with the likelihoodof financial statement

fraud

Audit committee size

Lack of audit committee system may cause ineffective monitoring. Beasley et al. (2000)

stated that the larger the audit committee, the lower the incident of fraud occurred. Composition

of audit committee becomes importance as many fraud cases appear to the surface recently.

Audit committee has function in helping board of commissioner to increase the quality

of financial report, control any violation, increase internal or external audit function, and

identify certain part which need attention of supervisory or board of commissionaire. Those

functions will make the audit committee size play important role in affecting occurrence of

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fraud within the company. The larger audit committee size, the lower incident fraud.

Hypothesisderived as follows:

H9: Audit Committee size is negatively relate with thelikelihood offinancial statement fraud

Independent Audit committee

Independent audit committee has relationship with incident of fraud (Abbot et al.,

2001). The existing of independent audit committee is expected to performed effective

monitoring to-wards company without involving personal interest inside. Independent audit

committee should be people who have no role or conflict of interest within the company.

Robinson (cited in Skousen et al., 2006) stated that independent audit committee sees as

member who is not current employee of the firm, management, professional advisor, director,

and people who have no significant transaction with firm, former officer or employee of firm

and related party. Independent members will perform better monitoring towards management.

Increasing in number of independent audit committee associated with lower incident financial

statement fraud.

H10: Independent Audit Committee is negatively related to likelihood financial statement fraud

2.5.3. Rationalization and Financial Statement Fraud

Previous researchs mentioned that rationalization is difficult to measure. Auditor

opinion is usually used to be a proxy to represent rationalization factor because fraud action

done by perpetrators in rationalizing their action could be detected by auditor.Auditor opinion

towards financial report can be used to draw the conclusion whether in such company there is

propensity to fraud or otherwise.

H11: auditor opinion is negatively related to likelihood financial statement fraud

METHOD

Sample and Data

This research is using secondary data obtained from consolidated financial statements

of manufacturing companies listed in Indonesia Stock Exchange (IDX) for the years of 20011-

2012. The chosing of manufacturing companies as samples is due to the characteristic of the

industry that encourage higher earnings management practices compare to other industry.

Manufacturing companies in Indonesia consist of several business sectors; basic industry and

chemicals, miscellaneous industry, and consumer goods industry.

Samples are taken from the year of 2011 and 2012 with consideration that the effect

caused by fraud action cannot be directly detected by using only one year of observation. The

fraud impact can be seen at least in two years observation. This is consistent with the argument

of Beasley, et al (1999) that “Most of fraud overlapped at least two fiscal periods, frequently

involving both quarterly and annual financial statements. The average fraud period extended

over 23.7 months”.

This research is constructed using panel data period of 2011 to 2012.Baltagi (2001)

argued that “Panel data provide more informative data, more variability, less collinearity among

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the variables, more degrees of freedom and more efficiency”. Another advantages using panel

data is able to dealing with heterogeneity, control unobservable heterogeneity of each firm

effect, and provide more information that will minimize bias.

The Samples were selected using purposive sampling method which allows authors to

obtain specific information. Sampling Criteria in data selection are as follows:

1. Manufacturing companies listed on the Stock Exchange in 2011-2012.

2. The company is not delisting along the period of 2011-2012.

3. Company publishes independent auditor's report and financial statements ended on

December 31 with Indonesia’s currency.

4. Company has a complete data needed.

The sample screening is shown on table 3.1.Data collected are financial statements

report and independent of auditors' report of manufacturing companies from Reuters

Datastream, Fact book IDX, IDX website, company’s annual reports taken from Indonesian

Stock Exchange website, and company’s website for the period of 2011 and 2012.

Table 3.1

Sample

Those data is processed using E-views and SPSS software. Along the regression

process, from 266 number of observation, it changes into 208 observations because the authors

exclude the outlier exist in regression.

Research Model

This study use model similar as Skousen and Wright (2006) did in their research. The

main model will analyze the effect of variables derived from pressure, opportunity, and

rationalization towards financial statement fraud which proxied by earning management using

discretionary accruals. The model is as follows:

DACC= α+ β1 AGROW+β2 SGROW+β3 SALAR+β4 SALTA+β5 NICFOTA+β6 ROA+β7

LEV+β8 BOUTP+β9 AUDREPORT+β10 AUDCSIZE+ β11 IND+β12 FSIZE+ ε

Notes:

DACC = Absolute value of discretionary accruals

AGROW = % change in assets for the two years prior

SGROW = Growth in sales

Manufacturing sector company 138

Delisted Company from 2011 to 2012 2

Company incomplete data 3

Total companies 133

Total Sample (133 * 2 years) 266

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SALAR = Financial security (Sales/accounts receivables)

SALTA = Financial security ratio (sales / total assets)

NICFOTA = Earnings growth

ROA = Financial target

LEV = External pressure ratio (total debt / total assets)

BOUTP = % Independent board members

AUDREPORT= A dummy variable, 1= an unqualified opinion, 0= an unqualified opinion with

additional language

AUDCSIZE = Number of board members who are on the audit committee divided by the

board size

IND = % independent audit committee

FSIZE = Firm Size

Dependent Variables

Dependent variable of this research is financial statement fraud. Earnings management

is used to measure financial statement fraud. Earnings management will be measured by

discretionary accruals (DACC) referring to Modified Jones Model (1991) . Thee model used is

as follows:

DACC it = TACC it – NDACC it

Note:

DACC it = Discretionary accruals of firm i in year t

TACC it = Total accruals firm i in year t

NDACC it = Non-discretionary accruals firm i in year t

Independent Variable

This study uses eleven independent variables derived from pressure, opportunity and

rationalization, based on previous research conducted by several researches such as Skousen

and Wright (2006), Beasley (1996), Dechow et al (2010), Summers and Sweeney (1998),

Persons (1995), Beneish (1997), DeAngelo et al (1994), and Skousen et al (2009).

Variable used to measure existence of pressure in company’s management are consist

of sales growth, rapid asset growth, cash flow indicator ratio, receivable turnover ratio, asset

turnover, leverage, and return on asset.Opportunity variable consist of; independent board

members, audit committee size, independent audit committee. Rationalization will be proxied

by auditor opinion.

Control Variable

This research use firm size as control variable to neutralize effect and avoid bias in

research model. Firm Size is calculated using Logarithm natural (Ln) of Total Assets

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RESULT and ANALYSIS

Descriptive Statistic

Table 4.1

Descriptive Statistics

Variables Mean Median

Maximum Minimum

Std.

Dev. n

DACC -0.002 2.43E-17 0.179 -0.357 0.066 208

AGROW 0.129 0.114 0.601 -0.775 0.145 208

SGROW -0.033 -0.023 0.434 -0.907 0.158 208

SALAR 7.568 6.634 22.989 2.347 4.137 208

SALTA 1.216 1.083 5.837 0.060 0.656 208

NICFOTA 0.019 0.024 0.235 -1.171 0.117 208

ROA 8.415 6.725 37.47 -13.59 8.421 208

LEV 0.271 0.251 1.581 0 0.219 208

BOUTP 0.164 0.167 0.4 0 0.079 208

AUDREPORT 0.962 1 1 0 0.193 208

AUDCSIZE 0.125 0.118 0.333 0.043 0.048 208

IND 0.331 0.333 0.5 0.2 0.050 208

FSIZE 21.074 20.853 25.918 18.295 1.521 208

Table 4.1 shows the result of descriptive statistic for each variable. Descriptive statistic

for discretionary accruals shows quite larger range from maximum to minimum values. Asset

growth (AGROW) which represents growth in asset has quite large range between minimum

and its maximum values. Minimum values shows values -0.775 which dominated by sub

industries to metal and allied products. While maximum values 0.601 its hold by sub industries

textile and garment. Mean values of asset growth compares to its standard deviation give 0.1875

percentage point which indicates that only 18% of manufacturing company experience growth

in asset.

Earnings Management Practices

Table 4.3 shows that mean of discretionary accruals (DACC) equals to 0. It indicates

the lower tendency of earning management practices .

Table 4.3

One Sample Test

Test Value = 0

t df

Sig.

(2-tailed)

Mean

Difference

Dacc .000 260 1.000 .0000000

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Regression Model Result

The result of regression model testing shows that regression model is robust in

analysing the relationship between all independent and dependent variables as shown on tabel

4.4. The twelve independent variables together explain the variationof financial statement fraud

proxied by DACC.

Table 4.4

Goodness of Fit Test

R-squared 0.7833

Adjusted R-squared 0.4784

S.E. of regression 0.0479

F Test 2.5692

Prob (F statistic) 0,000

The value of Adjusted R-squared for the model on table 4.4 shows that all independent

variables explain 47.84% of Financial statement fraud. The probability of F-statistics shows

value 0.0000, while this research use significant value of α = 5%.

Table 4.6 is shows the result of coefficient for individual parameter significance test .

The model of regression derived from table 4.6 is as follows:

Table 4.6 shows that all independent variables of this research and one control variable

which is firm size (FSIZE) are significantly influence financial statement fraud proxied by

discretionary accruals (DACC). All those variables have probability of t-statistic even smaller

than 1% significance level.

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Table 4.9 shows that research model without including firm size as control variable.

All elevenindependent variables remains significant in influencing financial statement fraud.

Value in prob. F-stat indicates that overall model represent better model in explaining

relationship between independent and dependent variables. Value of adjusted R- square means

that 47 % of this model is able to explain the relationship independent variable towards

likelihood financial statement fraud.

Table 4.10 shows regression model by inclusion firm size as a control variables in the

model. The model shown on table 4.10 explains that inclusion of control variable does not affect

explanatory variable significantly. The sign of independent variable correlation remains the

same as previous results. Differences exist in changing value of coefficient of each variable and

different sign of Constanta coefficient from positive into negative sign. R square of model

slightly increase while the F-test slightly decrease compare to previous model without including

control variable.

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The coefficient regression shown on table 4.10 all independent variables influence

significantly earnings management practices (DACC). Eight independent variables which are

Asset Growth (AGROW), Receivable Turnover Ratio (SALAR), Asset Turnover ratio

(SALTA), Cash Flow Indicator Ratio (NICFOTA), Return on Asset (ROA), Independent Board

Members (BOUTP), Auditor Opinion (AUDREPORT), and Firm Size (FSIZE), influence

positively DACC while 4 Independent variables negatively influence DACC which are Sales

Growth( SGROW), Leverage (LEV), Audit Committee Size (AUDCSIZE), Independent Audit

Committee (IND).

Discussion

This study found that the higher asset turnover ratio (SALTA), the higher the tendency

of financial statement fraud occurred. Higher percentage in total asset ratio indicates that

company generate more sales, but this sales could come from related party’s transaction;

affiliates, parent companies, and subsidiaries which turns out that the amount are made looking

good. This finding is supported by Chen and Elder (cited in Zack, G.M, 2013)who explain that

“sudden or ongoing increasing in this ratio could mean that company is generating revenues

from transactions with affiliated entities and this revenue could be intentionally made”.

This research also found that as outside members of board (BOUTP) size increases,

the financial statement fraud practices also increases. It contrary with hypothesis expected

which is thefewer the number of outside members on board of directors the more the financial

statement fraud occurred.

The reason beyond the positive association between percentages of outside members

to occurrence of fraud is possibly caused by facts that outside members usually hold other

directorship position in other firms. When outside board members hold more position in the

company, it will reduce her or his monitoring responsibilities for the other companies (Beasley,

1996). This condition might also affected by commissionaire independent phenomena as an

actor to collude with perpetrator and do not stop the unlawful acts. In addition, Independent

board is not always an independent person. In fact, usually majority board of directors will

appoint a specific person to fill the position of an independent board that is consistent with the

objectives of board members of the company.

Empirical result of the study regarding the firm size (FSIZE) found the tendency that

financial statement fraud practices are smaller in larger firm compare to small firm size. The

other fact is that the smaller the firm the bigger the propensity of fraud occurred.This result is

consistent with Povel, Singh, and Winton (2007) and Wang (2008) finding which argued that

growth firms are more likely to commit fraud because firms that better access to external capital

market are more likely to engage in fraud because other motivation of doing fraud are also to

temporary inflate security prices and lower cost of external finance

CONCLUSION

This study investigate the effect of fraud motivation through Cressey’s fraud triangle

or fraud risk factor which are pressure, opportunity, and rationalization. Analysis results shows

that Pressure, Opportunity, and Rationalization affect the tendency of financial statement fraud

behavior at manufacturing companies in Indonesia. Pressure and opportunity is the most

prevalent motivation in manufacturing companies in Indonesia to commit financial statement

fraud.

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The effect of three pressure variables; asset growth, sales growth, Return on Asset, and

two opportunity variables which are audit committee size and percentage of audit committee

members who are independent of company significantly predict financial statement fraud.

Those variables are consistent with hypothesis and previous study conducted by Skousen and

Wright (2006), Francis and Krishnan (1999), Beasley (1996), Beasley (2000), Dechow et al.

(1996), Beneish (997).

Variables such as accounts receivable turnover, asset turnover, cash flow to earnings

growth, leverage, percentage board members who are outside members, auditor opinion, and

firm size also significant in explaining the influence of fraud motivation with the tendency of

financial statement fraud practices.

The result of thisresearchsuggests companies to focus on specific factors which

vulnerable of fraud, especially tighten company regulation to reduce opportunity motivation in

committing fraud, for example increase monitoring on operational activities by implementing

random and material checking on specific account.

Government through OtoritasJasaKeuangan (OJK)need to take active role in

formulating policies, regulations, and standards in an effort to narrow the opportunities of fraud.

For example OJK could reduce the pressure and opportunity motivation of company in doing

fraud by requires listed companies on the securities exchanges to have Whistleblowing Policy

(WBP) regarding to regulation No. X.K. 6 attachment decision of OJK Chairman OJK: Kep‐

431/BL/2012 on August 1, 2012 about submission annual report of the issuer or listed company.

OJK issupposed to tighten this regulation to improve the quality of information disclosure in

annual report of listed companies as source of important information for shareholders and public

in making investment decisions.

Further study is suggested to use other method to detect financial statement fraud as

was done by many researchers, for example by classifying fraud and non-fraud firm to get a

better picture of the relationship between fraud motivation and financial statement fraud

practices or other methods.

REFERENCE

Albrecht, C., Conan, A. (2008). The nature of Financial Statement Fraud. Internal Auditing, 23

(4), pg. 22

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