Ida Bagus Anom Yasa, Moch. Mirza Yahya Thalib, Luh Mei Wahyuni

Utilizing the diamond fraud theory perspective to analyze financial statement fraud

Introduction

Utilizing the diamond fraud theory perspective to analyze financial statement fraud. Analyzes financial statement fraud in Indonesian banks using diamond fraud theory. Finds pressure and rationalization significantly influence fraud, while opportunity and capability do not.

Abstract

This study aims to test the influence of elements of the fraud diamond theory, including pressure, opportunity, rationalization, and capability, on financial statement fraud. The population in this study were companies in the banking sub-sector listed on the Indonesia Stock Exchange for the period 2020-2022. The sample was selected using a purposive sampling method with four criteria, which resulted in 40 companies with 3 years of observation, so 120 samples were obtained that were worthy of observation. This study uses multiple regression analysis using the SPSS program. In this study, the pressure variable is measured using ROA, opportunity using ineffective monitoring, and rationalization using the total accrual ratio. In contrast, the capability variable is measured using the change of directors. The dependent variable is financial statement fraud measured using earnings management. The study's results indicate that pressure and rationalization have a positive and significant influence on financial reporting fraud in banking sub-sector companies listed on the IDX. On the other hand, opportunities and capabilities do not show a significant influence on financial reporting fraud in these companies.

Review

This study offers a timely and relevant investigation into the drivers of financial statement fraud, utilizing the well-established fraud diamond theory within the specific context of the Indonesian banking sector. By examining pressure, opportunity, rationalization, and capability, the research aims to provide insights into corporate malfeasance. The application of multiple regression analysis to a sample of 120 observations from 40 companies over three years (2020-2022) is a commendable effort to empirically test theoretical constructs. The findings, indicating a positive and significant influence of pressure and rationalization on financial reporting fraud, while opportunity and capability show no such significance, present an interesting and potentially nuanced understanding of fraud dynamics in this particular market. However, a critical review reveals several methodological concerns, primarily regarding the operationalization of the fraud diamond variables. Measuring "pressure" using ROA, while potentially reflecting pressure to maintain performance, might be ambiguous as high ROA typically indicates strong financial health rather than the financial distress often linked to fraud. More significantly, the use of "total accrual ratio" as a proxy for "rationalization" is problematic. Rationalization is a psychological element—the internal justification for committing fraud—whereas the total accrual ratio is an accounting metric frequently used to detect earnings management, which is the dependent variable (financial statement fraud measured using earnings management). This creates a strong risk of endogeneity or tautology, where a measure closely related to the act of fraud is used as a proxy for the psychological intent, and then the act itself is measured. Similarly, "change of directors" as a measure for "capability" seems weak; capability typically refers to the perpetrator's specific skills, knowledge, or position that enables the fraud, not merely a change in leadership. The lack of significance for opportunity and capability, two fundamental components of the fraud diamond, further highlights potential issues with their measurement or suggests unique contextual factors that warrant deeper exploration beyond what the current proxies allow. Despite these limitations, the study makes an initial contribution by applying the fraud diamond theory to the Indonesian banking sector. The findings regarding the significance of pressure and rationalization provide a starting point for understanding fraud precursors in this region. Future research would greatly benefit from a more robust and conceptually aligned operationalization of the fraud diamond elements, particularly for rationalization and capability, possibly incorporating qualitative methods or more sophisticated quantitative proxies that capture the psychological and organizational aspects more accurately. Exploring the specific contextual factors within the Indonesian banking environment that might explain the non-significance of opportunity and capability would also enrich the understanding of fraud prevention strategies and offer more targeted recommendations for regulators and corporate governance bodies.

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