Finances, accounting and audit

The pentagon fraud theory perspective: understanding of motivation of executives to manipulate with the financial statements of a state-owned enterprise

Economic Annals-XXI

Economic Annals-ХХI: Volume 194, Issue (11-12), Pages: 104-110

Citation information:
Setiorini, K. R., Rahmawati, Payamta, & Hartoko, S. (2021). The pentagon fraud theory perspective: understanding of motivation of executives to manipulate with the financial statements of a state-owned enterprise. Economic Annals-XXI, 194(11-12), 104-110. doi: https://doi.org/10.21003/ea.V194-13

View Full TextDownload PDF

Kusumaningdiah Retno Setiorini
MA (Economics),
Lecturer,
FEB-Akuntansi,
Alma Ata University Yogyakarta
Jl. Brawijaya No.99, Jadan, Tamantirto, Kec. Kasihan, Kabupaten Bantul, Daerah Istimewa Yogyakarta, 55184, Indonesia
k.retno.s@almaata.ac.id
ORCID ID: https://orcid.org/0000-0001-8290-5310

Rahmawati
MA (Economics),
Lecturer,
PDIE UNS,
Sebelas Maret University
Jl. Ir. Sutami No.36, Kentingan, Kec. Jebres, Kota Surakarta, Jawa Tengah, 57126, Indonesia
Rahmaw2005@yahoo.com
ORCID ID: https://orcid.org/0000-0002-9931-1380

Payamta
PhD (Economics),
Lecturer,
PDIE UNS,
Sebelas Maret University
Jl. Ir. Sutami No.36, Kentingan, Kec. Jebres, Kota Surakarta, Jawa Tengah, 57126, Indonesia
payamtaakauntan@gmail.com
ORCID ID: https://orcid.org/0000-0003-2344-8564

Sri Hartoko
PhD (Economics),
MBA,
Lecturer,
PDIE UNS,
Sebelas Maret University
Jl. Ir. Sutami No.36, Kentingan, Kec. Jebres, Kota Surakarta, Jawa Tengah, 57126, Indonesia
sri.hartoko@yahoo.com
ORCID ID: https://orcid.org/0000-0001-8327-9198

The pentagon fraud theory perspective: understanding of motivation of executives to manipulate with the financial statements of a state-owned enterprise

Abstract. State-Owned Enterprises (SOEs) in Indonesia are important economic actors in the national economy. However, SOEs have problems with accountability and financial transparency. SOEs problems ultimately lead to high economic costs and reduce efficiency. This study aims to determine the practice of fraudulent financial statements in SOEs. The method used in this research is descriptive. Data was obtained using observation and documentation of the Garuda Indonesia Group company which is a major airline in Indonesia. In addition, data were obtained from the Indonesia Stock Exchange (IDX), which consists of 36 samples. This study analyzes the financial statements from 2010 to 2018 as an independent variable. The dependent variable is measured by the elements of the pentagon fraud theory (pressure, opportunity, rationalization, competence, and arrogance) to detect fraudulent financial statements. Data analysis uses Kernel regression parameters, namely R-squared, predictive sign, and standard error, to detect earnings management in the context of the Garuda Indonesia Group.
The results show that all the elements of the pentagon fraud theory affect financial statements. The study results show that the pentagon theory of fraud can be relied upon to detect misreporting in financial statements of SOEs. Furthermore, the study results are expected to be considered by related parties to be better prepared when detecting financial statement fraud using the fraud pentagon theory model.

Keywords: Financial Statement Fraud; Fraud Pentagon Theory; Cheat Triangle; Fraud Triangle; Revenue Management; State-Owned Enterprise; SOE; Public Company; Motivation; Manipulating; Misreporting

JEL Classifications: F30; F33; F50; F51; A10

Acknowledgements and Funding: The authors received no direct funding for this research.

Contribution: The authors contributed equally to this work.

Data Availability Statement: The dataset is available from the authors upon request.

DOI: https://doi.org/10.21003/ea.V194-13

References

  1. Apriliyanti, I. D., & Kristiansen, S. O. (2019). The logics of political business in state-owned enterprises: the case of Indonesia. International Journal of Emerging Markets, 14(5), 709-730.
    doi: https://doi.org/10.1108/IJOEM-08-2018-0433
  2. Austin, Ch. R., Bobek, D. D., & Jackson, S. (2021). Does prospect theory explain ethical decision making? Evidence from tax compliance. Accounting, Organizations and Society, 94, 101251.
    doi: https://doi.org/10.1016/j.aos.2021.101251
  3. Ayaganova, M., Pritvorova, T., Mamrayeva, D., & Tashenova, L. (2019). Social entrepreneurship: Business models and strategies for their development. Economic Annals-XXI, 178(7-8), 96-104.
    doi: https://doi.org/10.21003/ea.V178-08
  4. Braun, R. L. (2000). The effect of time pressure on auditor attention to qualitative aspects of misstatements indicative of potential fraudulent financial reporting. Accounting, Organizations and Society, 25(3), 243-259.
    doi: https://doi.org/10.1016/S0361-3682(99)00044-6
  5. Dellaportas, S. (2013). Conversations with inmate accountants: Motivation, opportunity and the fraud triangle, Accounting Forum, 37(1), 29-39.
    doi: https://doi.org/10.1016/j.accfor.2012.09.003
  6. Dragomir, V. D., Dumitru, M., & Feleagă, L. (2021). Political interventions in state-owned enterprises: The corporate governance failures of a European airline. Journal of Accounting and Public Policy, 40(5), 106855.
    doi: https://doi.org/10.1016/j.jaccpubpol.2021.106855
  7. Elsas, Ph. I. (2008). X-raying Segregation of Duties: Support to illuminate an enterprise’s immunity to solo-fraud. International Journal of Accounting Information Systems, 9(2), 82-93.
    doi: https://doi.org/10.1016/j.accinf.2007.10.005
  8. Greenwood, C. A. (2015). Whistleblowing in the Fortune 1000: What practitioners told us about wrongdoing in corporations in a pilot study, Public Relations Review, 41(4), 490-500.
    doi: https://doi.org/10.1016/j.pubrev.2015.07.005
  9. Guedhami, O., & Pittman, J. A. (2011). The choice between private and public capital markets: The importance of disclosure standards and auditor discipline to countries divesting state-owned enterprises. Journal of Accounting and Public Policy, 30(5), 395-430.
    doi: https://doi.org/10.1016/j.jaccpubpol.2011.06.004
  10. Harymawan, I., Nasih, M., Suhardianto, N., & Shauki, E. (2020). How does the presidential election period affect the performance of the state-owned enterprise in Indonesia? Cogent Business & Management, 7(1), 1750330.
    doi: https://doi.org/10.1080/23311975.2020.1750330
  11. Johnson, P. E., Grazioli, S., & Jamal, K. (1993). Fraud detection: Intentionality and deception in cognition, Accounting, Organizations and Society, 18(5), 467-488.
    doi: https://doi.org/10.1016/0361-3682(93)90042-5
  12. Kravchenko, S. A. (2021). From formal rationality to the digital one: Side-effects, ambivalences, and vulnerabilities. RUDN Journal of Sociology, 21(1), 7-17.
    doi: https://doi.org/10.22363/2313-2272-2021-21-1-7-17 (in Russ.)
  13. Levi, M., & Doig, A. (2020). Exploring the ºShadows˜ in the Implementation Processes for National Anti-fraud Strategies at the Local Level: Aims, Ownership, and Impact. European Journal on Criminal Policy and Research, 26, 313-333.
    doi: https://doi.org/10.1007/s10610-019-09422-6
  14. Li, Y., Miao, X., Zheng, D., & Tang, Y. (2019). Corporate Public Transparency on Financial Performance: The Moderating Role of Political Embeddedness. Sustainability (Switzerland), 11(19), 5531.
    doi: https://doi.org/10.3390/su11195531
  15. Libby, R., Rennekamp, K. M., & Seybert, N. (2015). Regulation and the interdependent roles of managers, auditors, and directors in earnings management and accounting choice, Accounting, Organizations and Society, 47, 25-42.
    doi: https://doi.org/10.1016/j.aos.2015.09.003
  16. Lisic, L. L., Silveri, S., Song, Y., & Wang, K. (2015). Accounting fraud, auditing, and the role of government sanctions in China. Journal of Business Research, 68(6), 1186-1195.
    doi: https://doi.org/10.1016/j.jbusres.2014.11.013
  17. Majeed, M. A., & Yan, Ch. (2021). Financial statement comparability, state ownership, and the cost of debt: Evidence from China. Research in International Business and Finance, 58, 101497.
    doi: https://doi.org/10.1016/j.ribaf.2021.101497
  18. Martins, O. S., & Júnior, R. V. (2019). The Influence of Corporate Governance on the Mitigation of Fraudulent Financial Reporting. Review of Business Management, 22(1), 65-84.
    doi: https://doi.org/10.7819/rbgn.v22i1.4039
  19. Murphy, P. R. (2012). Attitude, Machiavellianism and the rationalization of misreporting, Accounting, Organizations and Society, 37(4), 242-259.
    doi: https://doi.org/10.1016/j.aos.2012.04.002
  20. Norman, C. S., Rose, J. M., & Suh, I. S. (2011). The effects of disclosure type and audit committee expertise on Chief Audit Executives’ tolerance for financial misstatements. Accounting, Organizations and Society, 36(2), 102-108.
    doi: https://doi.org/10.1016/j.aos.2011.02.004
  21. Qiu, S., He, H.-Q., & Luo, Y.-sh. (2019). The value of restatement to fraud prediction. Journal of Business Economics and Management, 20(6), 1210-1237.
    doi: https://doi.org/10.3846/jbem.2019.10489
  22. Rakhman, F. (2017). Can Partially Privatized SOEs Outperform Fully Private Firms? Evidence from Indonesia. Research in International Business and Finance, 45, 285-292.
    doi: https://doi.org/10.1016/j.ribaf.2017.07.160
  23. Teschner, N., & Paul, H. (2019). The impact of divestitures on shareholder wealth – The wealth. European Journal of Management and Business Economics, 30(1), 55-71.
    doi: https://doi.org/10.1108/EJMBE-08-2019-0133
  24. Turbin, A. (2020). Deception begins with trade . . . Sibirica, 19(3), 37-59.
    doi: https://doi.org/10.3167/sib.2020.190304
  25. Ulupui, I. G. K. A., Murdayanti, Y., Yusuf, M., Pahala, I., & Zakaria, A. (2020). Integrated Reporting Disclosure and Its Implications on Investor Reactions. Journal of Asian Finance, Economics and Business, 12(7), 433-444.
    doi: https://doi.org/10.13106/jafeb.2020.vol7.no12.433
  26. Wang, R., Ma, S., & Xu, X. (2021). Heterogeneous Shareholders’ Participation, COVID-19 Impact, and Innovation Decisions of State-Owned Firms: Evidence from China. Sustainability, 13(8), 4406.
    doi: https://doi.org/10.3390/su13084406
  27. Yang, D., Jiao, H., & Buckland, R. (2017). The determinants of financial fraud in Chinese firms: Does corporate governance as an institutional innovation matter? Technological Forecasting and Social Change, 125, 309-320.
    doi: https://doi.org/10.1016/j.techfore.2017.06.035
  28. Ye, S., Zeng, J., Liao, F., & Huang, J. (2021). Policy Burden of State-Owned Enterprises and Efficiency of Credit Resource Allocation: Evidence from China. SAGE Open, 11(1).
    doi: https://doi.org/10.1177/21582440211005467
  29. Yin, H., & Zhang, R. (2019). The Nature of Controlling Shareholders, Political Background and Corporate Anti-Corruption Practice Disclosure. Journal of Asian Finance, Economics and Business, 6(1), 47-58.
    doi: https://doi.org/10.13106/jafeb.2019.vol6.no1.47
  30. Zhang, J., Li, L., Yu, T., Zhang, D., Zhao, G., & Wen, H. (2020). Marketization Allocation, Land Price, and Local Government Land Speculation, China. International Journal of Strategic Property Management, 24(5), 335-347.
    doi: https://doi.org/10.3846/ijspm.2020.13128

Received 22.09.2021
Received in revised form 12.10.2021
Accepted 20.10.2021
Available online 27.12.2021

View Full TextDownload PDF
In, , , , , , , , , , ,

More Papers

Internal auditor independence and audit quality: the influence of mediation role of professional ethics investigation (on the example of Gorontalo city inspectorate in Indonesia)

Usman, Fitrijanti, T., Soemantri, R., & Koeswayo, P. S. (2023). Internal auditor independence and audit quality: the influence of mediation role of professional ethics investigation (on the example of Gorontalo city inspectorate in Indonesia). Economic Annals-XXI, 206(11-12), 24-29. doi: https://doi.org/10.21003/ea.V206-04

Economic Annals-XXI