Fraud awareness survey of private sector in Indonesia
| DOI | https://doi.org/10.1108/JFC-03-2014-0016 |
| Date | 06 July 2015 |
| Pages | 329-346 |
| Published date | 06 July 2015 |
| Author | Sylvia Veronica Siregar,Bayu Tenoyo |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Fraud awareness survey of
private sector in Indonesia
Sylvia Veronica Siregar
Department of Accounting, Faculty of Economics,
Universitas Indonesia, Depok, Indonesia, and
Bayu Tenoyo
Department of Computer Science, Universitas Indonesia, Depok, Indonesia
Abstract
Purpose – The purpose this study is to investigate the level of fraud awareness of the private sector in
Indonesia, as well as steps that have been taken by corporations to detect or prevent fraud.
Design/methodology/approach – This paper presents a descriptive survey. In total, 67 respondents
returned the questionnaires, which can be considered suitable for a descriptive survey. Some
descriptive (included percentages, means) and inferential statistics (mean differences test) are used to
summarize and analyze the questionnaire results.
Findings – It was found that majority of respondents agree that fraud is a major concern for
businesses in Indonesia and that corporations have enough level of fraud awareness. Poor internal
control and lack of ethical values are ranked as the most likely reasons why entities are being threatened
by fraud, and a sound ethical policy and code of conduct is perceived as the most important fraud risk
management process. Corporations have implemented several tools to detect or prevent fraud, such as
internal audit and internal control. They also have a system in place for anonymous reporting of
suspicions of fraud, corruption or misconduct.
Originality/value – Private sector fraud awareness in emerging countries, especially in Indonesia, is
still rarely examined in extant literature.
Keywords Fraud awareness, Fraud prevention, Fraud detection
Paper type Research paper
1. Introduction
Nowadays, corporations all over the world face a completely different set of challenges,
such as globalization, rapidly evolving technology, rapid development in industry and
business, risks and complexity of information and data management. With these
changes, the risks, including fraud risks, faced by organizations have increased
substantially (KPMG, 2006). In response to this, entities are now more aware of the need
to have proactive methods of fraud detection and prevention to minimize the potential
fraud risk (Falcon Fraud Manager, 2008; Entrust, 2008; StreamBase, 2008, in Edge and
Sampaio, 2009).
What is fraud? According to Keller and Owens (2015), there are two categories of
frauds: internal and external. Internal frauds are committed by persons inside the
entities, such as employees, ofcers and directors. External frauds are committed by
persons outside the entities, such as vendors. Internal frauds can further be broken
down into two categories:
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Fraud
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Vol.22 No. 3, 2015
pp.329-346
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DOI 10.1108/JFC-03-2014-0016
(1) asset misappropriations; and
(2) Fraudulent nancial reporting (nancial statement fraud).
Example of asset misappropriations are revenue and cash receipts schemes, purchasing
and cash disbursement schemes, payroll and employee expense reporting schemes and
non-cash asset misappropriations. Whereas nancial statement frauds involve
fraudulent journal entries or managerial override of controls that have utilized journal
entries within accounting information systems (Debreceny and Gray, 2010).
Rezaee (2005) dene nancial statement fraud as a deliberate attempt by
corporations to deceive or mislead users of published nancial statements, especially
investors and creditors, by preparing and disseminating materially misstated nancial
statements. Examples are inappropriate revenue recognition, inappropriate
capitalization of expenses and a wide variety of inappropriate accruals.
There are several cases of nancial statement fraud (FSF) in the past decade (for
example, Enron and WorldCom in the USA; Lippo Bank, Kimia Farma and Indofarma in
Indonesia). FSF has created high costs for market participants, including investors,
creditors and employees. Rezaee (2002) states that this cost have reached more than
US$500 billion during the past several years. FSF is a serious threat to market
participants’ condence in published audited nancial statements.
ACFE study conducted in 2007-2008 in the USA estimated that companies lost 7 per
cent of their annual revenues due to fraud (ACFE, 2008). The PwC (2007) worldwide
study also revealed that 43 per cent of the companies that they surveyed had been a
victim of fraud in the years 2006 and 2007 and, on average, these companies suffer US$
2.42 million loss per company over two years. These studies demonstrate the huge
negative effect of fraud that companies face today. These escalating costs associated
with fraud, have driven the companies to use increasingly proactive methods of fraud
detection (Edge and Sampaio, 2009). Firms need to have advanced fraud detection
technologies to support the real-time screening of transactional data and detection of
ambiguous user behaviour prior to transaction completion. According to Jans et al.
(2010), rms should have the combination of fraud detection and fraud prevention to
lower fraud risk. Firms’ risk exposure would be substantially greater if they only focus
their attention on fraud detection.
Who is responsible to either detect or prevent fraud in the companies? Top
management and board should set the tone at the top. But the results of the 1999 COSO
Report (Beasley et al., 1999 in Rezaee, 2005) reveal that, in the majority of fraud cases
(more than 80 per cent), the chief executive ofcer and/or chief nancial ofcers were
associated with nancial statement fraud. Other individuals typically involved are
controllers, chief operation ofcers, board of director members, other senior vice
presidents and both internal and external auditors.
Internal and external auditors also play important roles. Internal auditors are the
rst-line defence against fraud because of their knowledge and understanding of the
business environment and the internal control. Internal auditors might play a variety of
roles to prevent and detect fraud in the entity, depending on the directives from
management, the board or audit committee. Although external auditors’ responsibility
is to give their opinion on the fairness of nancial statement, the users of audited
nancial statements generally expect external auditors to detect nancial statement
fraud. External auditors that work closely with internal audit can form an effective
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