Factors Influencing in The Fraudulent Financial Reporting: Muhammad Burhanudin Arifin, Andrian Budi Prasetyo
Factors Influencing in The Fraudulent Financial Reporting: Muhammad Burhanudin Arifin, Andrian Budi Prasetyo
Factors Influencing in The Fraudulent Financial Reporting: Muhammad Burhanudin Arifin, Andrian Budi Prasetyo
DOI: http://dx.doi.org/10.15294/jda.v10i1.15220
Received: July 29, 2018 Revised: September 5, 2018 Accepted: September 20, 2018 Published: September 30, 2018
Abstract
Fraudulent practice in financial report has resulted in the decrease of reliablity in financial report, caus-
ing losses for investors and creditors. The population used in this study are all listed on the Indonesia
Stock Exchange (BEI) throughout 2010-2016. The sampling method used is purposive sampling. The
number of samples used is 52 companies, consisting of 26 fraud companies obtained from the database
of sanctioned misstatement of financial reporting issued by OJK during 2010-2016 period and 26 non-
fruad companies with the same size determined under OJK regulation No. POJK.04 about Statement
of Registration in the Public Offering and Capital Addition by Granting Right of Priority Effect by
Companies with Small Scale Assets or Companies with Medium Scale Assets. This study used logistic
regression analysis to examine the research hypothesis. The results of this study indicate that financial
leverage and asset composition ratio have positive effect on the possibility of fraudulent financial report-
ing. Meanwhile, the profitability, liquidity, capital turnover, and receivable turnover ratio have negative
effect on the possibility of fraudulent financial reporting .
Keywords: financial leverage ratio; profitabilty ratio; asset composition ratio; liquidity ratio; capital
turnover tatio; receivable turnover ratio; fraudulent financial reporting
INTRODUCTION
Fraud has become a scandal in financial reporting. Evidently, many large companies
were dragged into fraud cases such as SK Global, Vivendi, Enron, Parmalat, Adelphia, Cendant,
WorldCom, and Royal Ahold (Albrecht, et al., 2008). Companies are caught up in the situation of
business globalization which has triggered intense business competition. As a result, companies
are looking for any way to keep their business operating properly and even become winners in
global business competition. One of the ways is to commit financial reporting fraud.
Many factors influence the occurrence of fraudulent financial reporting, such as conflicts
of interest between principal and agent, pressure, opportunities, and rationalization. The conflict
of interest and the three conditions cause problems that are explained in the agency theory and
fraud triangle theory.
Agency theory by Jensen and Meckling (1976), the emergence of conflict of interest and
information asymmetry between the principal (owner) and the agent (manager) causes fraudulent
financial reporting. The cause of the conflict of interest is the principal wants a high return while
METHOD
Fraudulent Financial Reporting
Fraudulent financial reporting is a deliberate misstatement or elimination of amount or
disclosure that aims to deceive users (Arens et al., 2012). Fraudulent financial reporting arises
from the encouragement to management to achieve the targets that the company determines so
that they manipulate financial statements. That is in accordance with the study of Ettredge et al.
(2010) which found evidence that managers manipulate their financial statements to meet certain
accounting targets. As a result, the aggressiveness of corporate financial reporting has increased
sharply. This is in line with the statement by Patelli & Pedrini (2015) which shows that the role
of top management correlates with the aggressiveness of financial reporting. Financial reporting
fraud can be measured using dummy variables measured by categorizing research samples, 1 for
companies that commit fraud and 0 for companies that do not commit fraud.
Company Leverage
Financial leverage is a level at which investors or businesses use borrowed money (Zainudin
& Hashim, 2016). Financial leverage can show the amount of debt used to finance a company’s
operations rather than using its own assets or capital. In this study, financial leverage is stated in
the symbols of LEV1 and LEV2 measured by the formula:
LEV1 = “Total Liabilities” /”Total Asset”
LEV2 = “Total Liabilities” /”Total Equities”
Profitability
Profitability is a ratio that can be used as a valuation technique to assess a company’s ability
to generate profits (Somayyeh, 2015). This ratio is a measure of managerial success in order to
maximize shareholder profits. Besides that, profitability can also describe the survival of the
company in the future. In this study, profitability is stated in the PROF symbol and measured by
Based on the table, it is known that the number of research samples is 52 companies. Financial
reporting fraud is a dependent variable, where the variable is categorical. Category 1 shows the
companies that commit fraud, while category 2 shows the companies that do not commit fraud.
Of the 52 sample companies, there are 26 companies or 50% categorized as fraudcompanies.
While the remaining 26 companies or 50% are categorized as non-fraud companies.
The description of the independent variables is explained through the results of descriptive
statistical analysis which provides an overview of the research data based on the minimum,
maximum, average, and standard deviations of each variable. The results of the descriptive
statistical test can be seen in the following Table 3.
Table 3. Descriptive Statistics
Variable N Minimum Maximum Mean Std. Deviation
LEV1 52 0.047 2.545 0.88033 0.686345
LEV2 52 0.045 0.798 0.40392 0.195779
PROF 52 -0.709 0.596 0.08508 0.276052
AC1 52 0.086 0.805 0.38768 0.207230
AC2 52 0.022 1.174 0.28089 0.282514
AC3 52 0.001 0.358 0.09930 0.103131
LIQ1 52 -0.163 0.760 0.16753 0.210112
LIQ2 52 0.174 8.242 2.51305 2.348826
LIQ3 52 0.155 7.978 2.03001 2.254041
CAPT 52 0.020 1.385 0.46938 0.417908
AR 52 0.111 20.546 6.42048 5.154609
Source: Data processing SPSS 2018
The results of the logistic regression test in table 6 are the basis for determining whether the
research hypothesis is accepted or rejected. The first independent variable is financial leverage.
The significance value of this variable is smaller than 0.05 and has beta coefficient values of 8.567
and 41.140, meaning financial leverage ratio has a positive effect on fraudulent financial reporting.
In conclusion, the greater the financial leverage ratio of a company, the higher the fraudulent
financial reporting. Based on the discussion, the first hypothesis is accepted.
The second independent variable is profitability. The significance value of this variable is
smaller than 0.05 and has a beta coefficient value of -20.747 which means that the profitability ratio
has a negative effect on fraudulent financial reporting. In conclusion, the smaller the profitability
ratio of a company, the higher the fraudulent financial reporting. Based on the discussion, the
second hypothesis is accepted.
The third independent variable is the composition of assets. The significance value of this
variable with measurements of AC1 and AC2 is smaller than 0.05 while AC3 is greater than 0.05 so
it is not significant. AC1 and AC2 have beta coefficient values of 19.567 and 11.748, meaning that
the asset composition ratio has a positive effect on fraudulent financial reporting. In conclusion,
the greater the asset composition ratio of a company, the higher the fraudulent financial reporting.
Based on the discussion, the third hypothesis is rejected.
The fourth independent variable is liquidity. The significance value of this variable is
smaller than 0.05 and has beta coefficient values of -39.294, -39.785, and -9.284 which means
that the liquidity ratio has a negative effect on fraudulent financial reporting. In conclusion, the
smaller the liquidity ratio of a company, the higher the fraudulent financial reporting. Based on
the discussion, the fourth hypothesis is accepted.
CONCLUSIONS
This study proves that financial ratios such as financial leverage, profitability, asset
composition, liquidity, capital turnover, and receivable turnover have an influence on the
possibility of fraudulent financial reporting.
Financial leverage ratio has a positive effect on the occurrence of fraudulent financial
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