The Fraud Diamond in Action: Predicting Financial Misreporting in Indonesia
Keywords:
fraudulent financial reporting, fraud diamond, beneish m-score model, financial targetsAbstract
Fraudulent financial reporting poses a significant threat to the stability and integrity of financial markets, impacting stakeholders' decisions and eroding investor confidence. This study investigates the influence of factors outlined in the fraud diamond framework on the likelihood of fraudulent financial reporting. Using a sample of 269 data points from 90 consumer cyclical and non-cyclical companies listed on the Indonesia Stock Exchange between 2020 and 2022, we examined the relationship between potential predictors of fraudulent reporting (financial targets, financial stability, external pressure, nature of industry, changes in auditors, audit reports, and changes of directors) and fraudulent financial reporting. Our findings indicate that, among the factors studied, only the presence of challenging financial targets significantly correlates with an increased likelihood of fraudulent financial reporting. Other factors examined did not show a statistically significant association. This study provides empirical evidence that unrealistic financial targets can create an environment conducive to financial statement manipulation. The findings underscore the importance of setting achievable targets and implementing robust internal controls to mitigate the risk of fraudulent financial reporting.
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