Detecting financial statement fraud through new fraud diamond model: the case of Indonesia
| DOI | https://doi.org/10.1108/JFC-06-2021-0118 |
| Published date | 26 July 2021 |
| Date | 26 July 2021 |
| Pages | 925-941 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Arief Hidayatullah Khamainy,Mahrus Ali,M. Arif Setiawan |
Detecting financial statement
fraud through new fraud diamond
model: the case of Indonesia
Arief Hidayatullah Khamainy
Faculty of Economics and Business,Universitas Wiraraja, Sumenep, Indonesia,and
Mahrus Ali and M. Arif Setiawan
Department of Criminal Law, Universitas Islam Indonesia,
Yogyakarta, Indonesia
Abstract
Purpose –The purpose of this paper is to evaluatethe effect of the new fraud diamond model in explaining
financialstatement fraud.
Design/methodology/approach –The variables used to examine the factors consist of motivation,
opportunity, personal integrity and capability. This research used manufactured companies listed in the
IndonesiaStock Exchange of the 2015–2019 period as the population.
Findings –There has been a positive influence between personal financial need (OSHIP), nature of the
industry (RECEIVABLE)and history of sale (SG) toward financial statement fraud, while the negativeeffect
is found onlyin the effective monitoring (IND).
Research limitations/implications –The new fraud diamond model theory which is used as a
reference in this study is a new and under-developed theory.So the author suggests that further researchon
this theory be carried out to strengthen thenew fraud diamond model theory and ensure whether it can be
used as a referenceto find out the causes of financial statement fraud. In addition, theobject used in this study
is limited to manufacturingcompanies, so the author suggests that further research combine severaltypes of
companies
.
Originality/value –The researchfinding supports the new fraud diamond model theory in elaboratingthe
financialstatement fraud phenomenon.
Keywords Financial statement fraud, Indonesia Stock Exchange, History of sale, Nature of industry,
New fraud diamond model, Personal financial needs
Paper type Research paper
1. Introduction
Research conducted by the Association of Certified Fraud Examiners (ACFE, 2020) shows
that financial statement fraud onlyoccurs in 10% of all fraud cases, but the average loss is
the greatest. Even the difference is largercompared to other forms of fraud, i.e. $954,000.00.
This shows the magnitude of the impact of the lossesarising from financial statement fraud.
In addition, Ernst and Young (2009) alsofound that more than half of the fraud perpetrators
were management. According to Tiffani and Marfuah(2015),financial statement fraud can
be defined as fraud committed by management in the form of material misstatements of
financial statements that harm investors and creditors. This fraud can be financial or non-
financial fraud. Accounting scandals have developed widely, as they have in the USA.
Spathis (2002) explainsthat in the USA, accounting fraud that befell Enron causes enormous
losses in almost all industries. The accountingscandal is estimated to cost Enron US$50bn
New fraud
diamond
model
925
Journalof Financial Crime
Vol.29 No. 3, 2022
pp. 925-941
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-06-2021-0118
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
in losses, plus investors’losses of US$32bn and thousands of Enron employees having lost
their pension funds of aroundUS$1bn.
According to Tiffani and Marfuah(2015), Indonesia as a country with unstable economic
conditions has also been hit by an outbreak of widespread accounting scandal cases. In
2001, there was a case of fraud in the financialstatements of PT Kimia Farma Tbk (PT KF).
PT KF is a state-owned company whose shares have been traded on the stock exchange.
Based on indications by the Ministry of State-Owned Enterprises and Bapepam auditors
(Bapepam, 2002), it was found that there was a misstatement in the financial statements
which resulted in an overstatement of net income for the year ended December 31, 2001
amounting to Rp32.7bn, which was 2.3% of sales and 24.7% of net income. This
misstatement was carried out by PT Kimia Farma by exceeding sales and inventory in 3
business units and inflating the inventory price that was authorized by the Production
Director to determine the inventory value in the distribution unit of PT Kimia Farma as of
December 31, 2001. In addition, the management of PT. Kimia Farma has double-recorded
sales of two business units. The double recordingis carried out in units that are not sampled
by external auditors (Koroy,2008).
In 2004, Bapepam (Capital Market Supervisory Agency) found that PT Pakuwon Jati
Tbk had violated Bapepam regulation number VIII.G.7 concerning the presentation of
financial statements. Finally,Bapepam gave administrative sanctions in the form of written
warnings to Pakuwon Jati Tbk and the company’s management (Bapepam in Efitasari,
2013). PT Sari Husada in 2005 was suspected of having violatedArticle 91 in stock trading.
The article states that each party is prohibited from taking action, either directly or
indirectly, with the aim of creating a false or misleading picture of the trading party’s
activities, market conditions or the price of securities on the Stock Exchange. In addition,
there were violations of Bapepam regulations related to sharing buyback transactions by
management and insiders of PT.Sari Husada Tbk. Finally, Bapepam took certain actions in
the form of fines to the commissioners and directors of PT. Sari Husada Tbk (Bapepam in
Efitasari, 2013).
Several cases of fraudulent financial statements provide evidence that fraud was
committed by top management (Skousen et al.,2009). Weak corporate governance also
causes fraudulent financial statements at the company. In Indonesia, several fraud cases
were also found in the government, banks and companies. The existence of fraud in
financial statements can mislead users of financial statements in making economic
decisions. According to Cressey (1953), there are three conditions that cause fraud,namely,
pressure, opportunity and rationalization, which are called the fraud triangle. These three
conditions are risk factorsfor fraud in various situations. Research related to the detection of
factors causing financial statement fraud mostly uses a fraud triangle analysis and a
development model for this theory, for example, the fraud diamond analysis (Wolfe and
Hermanson, 2004).
Over time, the theory regarding the fraudtriangle continues to develop such as the fraud
diamond theory (Wolfe and Hermanson,2004) which adds a capability factor as the cause of
fraud. This theory statesthat many frauds that generally involve large nominal are unlikely
to occur if there is no role of certain people with specialcapabilities in the company. In other
words, the person who commits the fraud must have the capability to recognize the open
door as a golden opportunity to take advantage of it. Then, Gbegi and Adebisi (2013)
designed a model called the new fraud diamond model which is an evolution of the fraud
diamond theory. According to their research, this model can be used as an alternate in
analyzing the factors that cause fraud, especially financial statement fraud. The difference
between the fraud diamond theory and the new fraud diamond model theory lies in the
JFC
29,3
926
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