The mediating effect of fraud awareness on the relationship between risk management and integrity system
| DOI | https://doi.org/10.1108/JFC-02-2022-0058 |
| Published date | 03 May 2022 |
| Date | 03 May 2022 |
| Pages | 618-634 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Ranto Partomuan Sihombing,Noorlailie Soewarno,Dian Agustia |
The mediating effect of fraud
awareness on the relationship
between risk management and
integrity system
Ranto Partomuan Sihombing
Department of Accounting, Faculty of Economics and Business,
Airlangga University, Surabaya, Indonesia and Department of Accounting,
Faculty of Economics and Business, Soegijapranata Catholic University,
Semarang, Indonesia, and
Noorlailie Soewarno and Dian Agustia
Department of Accounting, Faculty of Economic and Business,
Airlangga University, Surabaya, Indonesia
Abstract
Purpose –Government institutions in Indonesia have implemented an integrity system as a strategy to
prevent fraud and corruptionby integrating the risk management and organizational ethics.This integration
is important to increase the awareness of fraud in the organization.Based on self-determination theory, this
study examinesthe mediating effect of fraud awareness on risk management and integritysystems.
Design/methodology/approach –The study was carried out by using a quantitative approach. The
participants of the survey were auditors of the inspectorate of Ministries and Government Agencies in Indonesia.
The number of respondents was 103 auditors. The hypothesis testing method used the part ial least squares
structural equation modeling (PLS-SEM) approach. The data were processed by using WarpPls 7.0 software.
Findings –There are two main results in this study. First, risk managementdirectly affect the integrity of the
system. Second, fraud awarenessmediates the relationship between risk management and integrity systems.
Practical implications –The result of this study implicates the policymakers in Ministries and Government
Agencies in Indonesia to increase organizational fraud awareness through the involvement of internal audits with
risk management. The fraud awareness will greatly improve the performance of the integrity system.
Originality/value –This is the first study examined fraud awareness of integrity systems and risk
management.This study can enrich the literatureon internal audits, especiallythe duties of auditors with risk
management.
Keywords Risk management, Fraud awareness, Integrity system, Internal audit
Paper type Research paper
Introduction
Indonesia as a developing country is also still facing problems related to fraud and
corruption. This can be seen from the Corruption Perception Index (CPI) of Indonesiawhich
is still low compared to other ASEAN countries. Based on the data released by
The researcher is sincerely grateful to Endang Suryani Sihombing, S.E., Ak., M.Ak., QIA; Junior Auditor
of the Inspectorate of the Meteorology, Climatology and Geophysics Agency as one of the non-ministerial
government agencies in Indonesia that assisted the researcher in collecting respondent data.
JFC
30,3
618
Journalof Financial Crime
Vol.30 No. 3, 2023
pp. 618-634
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-02-2022-0058
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
Transparency International(2021), Indonesia’s CPI for the last 5 years has not experienceda
significant increase. Compared with Singapore and Malaysia, Indonesia’s ranking is still
below those two countries.
Encouraging the creation of integrity is an important element in the innovation process
of government in almost all countries in the world (Siddiquee, 2010;Johari et al., 2020).
Indonesia has attempted to carry out bureaucratic reform since 1998 (Haning, 2018).
According to Lukito (2016), Indonesia has built compliance with anti-corruption by
implementing a national integrity system following Law Number 31 of 1999 and had been
amended by Law Number 20 of 2001. According to this law, government and private
institutions musttogether build a national integrity system in various formsand levels.
This study aims to examine the mediating effect of fraud awareness on the relationship
between risk management and the integrity system. According to Huberts (2018),integrityis
the consistency and coherence between behavior and the prevailing norms or values in an
organization. He also said that integrity can be analogous to someone who acts professionally
in carrying out his duties carefully and responsibly. From an organizational perspective,
integrity can become a system if the behavior of individuals is in accordance with the
standards and rules that apply in an organization (Bauman, 2013;Breakey et al., 2015).
Molina (2016) and Zahari et al. (2021) explain that there are two integrity problems that
must be monitored by organizations: integrity violations and integrity risks. Integrity
violations are actionsby members of an organization that impair their ability to act in a way
that is consistent with their goals and values. Meanwhile, integrity risk is a condition and
behavior that increasesan organization’s vulnerability to integrity violations(Molina, 2016).
Further, he explained the risk of the integrity of the system can be managed properly by
involving identification,monitoring and even if it is possible, eliminatingthe risk factors.
Risk management correlates withorganizational integrity and ethical standards (Khalid
et al., 2016;Joseph et al., 2018). Hart (2016)said that the integration of risk management and
organizational ethics is an important part of the integrity system in overcoming the
occurrence of fraud. The case of fraud that is still often faced by governmentorganizations
in Indonesia is corruption. Indonesia as a developing country faces the problem of
corruption (Lukito,2016). Several cases of corruption still occur in Indonesia. The corruption
case against the Covid-19 social assistancefund cost the state IDR 14.59 billion. In addition,
there were also cases of fraud in the financial management of investment funds during the
2012–2019 period which causeda loss of IDR 2.78 trillion (Surya, 2021). As the various cases
of corruption and fraud still occur,there is a question on how high the level of integrity is in
government organizationsto make public trust increase (Johari et al.,2020).
Zanzig and Flesher (2011) stated that fraud awareness affects a person’s integrity.
Individuals who have a high level of fraud awareness can prevent individuals with low
integrity from committing fraud. To increase organizational fraud awareness requires risk
management support (Iyer and Samociuk,2006;Siregar and Tenoyo, 2015;Chowdhury and
Shil, 2019). This argument is reinforced by self-determination theory which states that
individuals who feel that thereare more people internalizing and integrating the valuesand
norms prevailing in the organization into their actions, will encourage the individual to
conform to the prevailingvalues and norms.
Fraud awareness is awareness about the importance of fraud prevention efforts by all
stakeholders in the organization (Yuniarti, 2017). A high level of fraud awareness can raise
awareness of all elements in the organization to exercise control over fraud through every
policy and rule that applies within the organization (Viton, 2003;Murphy and Dacin, 2011;
Zanzig and Flesher, 2011;Hodge and Carla Hodge, 2012;Mat et al., 2013;Eutsler et al.,
Nickell and Robb, 2016;Yuniarti,2017;Abdullahi and Mansor, 2018).
Risk
management
and integrity
system
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