When internal organizational factors improve detecting corruption in state-owned companies
| Date | 28 February 2023 |
| Pages | 376-407 |
| DOI | https://doi.org/10.1108/JFC-11-2022-0292 |
| Published date | 28 February 2023 |
| Author | Magda Siahaan,Harry Suharman,Tettet Fitrijanti,Haryono Umar |
When internal organizational
factors improve detecting
corruption in state-owned
companies
Magda Siahaan
Department of Accounting, Padjadjaran University, Bandung, Indonesia and
Trisakti School of Management, Jakarta, Indonesia
Harry Suharman and Tettet Fitrijanti
Department of Accounting, Padjadjaran University, Bandung, Indonesia, and
Haryono Umar
Department of Accounting, Perbanas Institute, Jakarta, Indonesia
Abstract
Purpose –The phenomenon of corruptionrequires extra handling to achieve zero corruption.The purpose
of this paper is to examine the integrated governance, risk management and compliance (GRC)
implementation, the quality of internal audits and management’s commitment to improving the ability to
detect corruptionand its impact on the company’sfinancial performance.
Design/methodology/approach –This paper used primary and secondary data. Financial statement
data and survey results from participantsin 69 state-owned companies were analyzed using the Partial Least
Square method.
Findings –There was a positive and significant effect of the integrated GRC implementation, quality of
internal audit and management’s commitment to increasing the organization’s internal capability in
detecting corruption. However, the failure to detect corruption mediates the effect of management
commitment on financial performance. Besides, the organization’s three internal factors could be better
because theirfunctions could be more optimal and require further improvement.
Research limitations/implications –State-owned companies are continuing to be restructured, so
these results can be helpful for now.However, they must update continuously with developments relatedto
the compositionand classification of state-owned companies.
Practical implications –Organizations can improve their ability to detect corruption in the workplace by
using an early warning system such as the integrated GRC, internal audit quality and a high commitment from
management.
Originality/value –To the author’s limited knowledge, empirical research on integrated GRC implementation,
internal audit quality and management commitment are still rare if they improve the detection of corruption ability. It
uses the factors that cause corruptionin the fraud hexagon to analyze the financial performance.
Keywords Detecting corruption, Financial performance, Integrated GRC, Internal audit quality,
Management commitment
Paper type Research paper
Introduction
The challenges state-ownedcompanies face today have remained the same from corruption
cases. Based on research by the Transparency International agency, Indonesia has a
JFC
31,2
376
Journalof Financial Crime
Vol.31 No. 2, 2024
pp. 376-407
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-11-2022-0292
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
corruption index perception rankingof 96 out of 180 countries. As for Indonesia Corruption
Watch, it recorded 1,173 corruption suspects in Indonesia throughout 2021. State losses
amounted to 62.9tn, which increaseddramatically from the previous year with contributors.
This loss is the most significant part of several corruption cases, especially in corporations
(Jawa Pos.com, 2022). As we all know, state-owned companies are supposed to help
administer the state government. However, in reality, many indications of fraud result in
company losses and impact state losses. If observed, then this phenomenon related to
corruption in Indonesia often occurs in companies with audit opinions, namely, unqualified
opinions in corruption cases. Companies that get an unqualified opinion from auditors but
have corruption cases indicatethat they still need to be more able to detect the occurrenceof
corruption both from the auditor’s ability side and the organization’s internal functions’
effectiveness. The number of acts of corruption in various aspects reflects the lack of
systematic and efficient fraud management in the current digital era, and internal control
has yet to be maximized.
Corruption is one of the three fraud typologies based on actions by ACFE (2016).
Specifically in Indonesia,according to Law Number 20 of 2001 concerning the Eradication of
Corruption Crimes,fraud seems to have different concepts for the private andpublic sectors.
The private sector still recognizes three types of fraud: asset misappropriation, fraudulent
financial reporting and corruption, but in the public sector, there is only one fraud offense,
namely, corruption, which includes asset misappropriation and fraudulent financial
reporting. Therefore, corruption significantly affects the company’sfinancial performance,
in accordance with experts’opinion that fraud is a financial crime. All fraudulent actions
will lead to money and undoubtedly impact the corporation, suffering financial losses,
decreasing corporate profitability and even disrupting corporate sustainability (Albrecht,
2008;Cockerell,2012;Gee, 2015;West and Bhattacharya, 2016).
Efforts to deal with the problem of corruption in the internal organization are not easy
and should be continuously handled.In particular, the activity of detecting corruption needs
to be optimally carried out by internal functions within the organization before corruption
occurs. However, with the spirit of zero tolerance of corruption, please take advantage of
organizationalfunctions or factors to improve their ability to detect corruption inthe form of
systems, personnel, competencies or commitments. It controls the possibility of corruption
with targeted resources or an organization’s internal system used as an early warning
system (Sampson, 2010). For example, Topaz (2016) suggests the importance of training
each of its employees to detect fraudwhere they work and to find out behavior through red
flags that can indicate and evaluatefraud (Dalnial et al.,2014;Dinapoli, 2008).
This paper uses three functionswithin the organization that plays a role in increasing the
ability to detect corruption: namely, first, integrated governance, risk management and
compliance (GRC) implementation as a new system that can serve as an early warning
system in anti-corruption efforts (Siahaan et al.,2022); second, internal auditors who have
adequate knowledge about fraud (Moyes, 2011); and third, management commitment that
reduces the level of corruptionrisk through ethical values, operational style, philosophyand
board of directors participation(Kassem and Higson, 2016). Although these three factors are
only some that can overcome the inability to detect corruption, this studyproves that these
three factors can providehope in fighting corruption in organizations.
This articlewill discuss systematicallystarting from the conceptualmodel of the research
and theoretical background and continue with a literature review and ten hypotheses,
followed by a methodology equipped with measurements and a discussion of empirical
results.Next, we explain the implications,limitations and futureresearch opportunities.
Corruption in
state-owned
companies
377
Conceptual model of the study
The relationship between the five variablesin this study is shown in Figure 1, which shows
ten conjectures. First, internal factors of the organization: integrated GRC implementation,
internal audit quality and management commitment can improve internal capabilities to
detect corruption. In addition, these three factors can also improve financial performance,
either directly or by detecting corruption. Furthermore, it can mean that an increase
influences the achievement of financial performance in detecting corruption. More details
about Figure 1 are providedin the next section.
Theoretical background
Achieved outcome fromagency theory (Jensen and Meckling, 1976) as a grand theory in this
research is to solve researchproblems, namely, the factors that influence the increase in the
ability to detect corruption. That is because of a conflict of interest between the principal
and agent. These factors are GRC, internal audit quality and management commitment
which should be maximized as well as possiblein achieving organizational goals, especially
financial performance. Stewardship theory (Davis et al.,1997) is a middle-range theory
because the problems between agents and principals (conflict of interest) should not occur.
Agents as stewards (servants) or employees (subordinates) who work to fulfill the interests
of their superiors (Wiseman et al., 2012). The superordinate must be able to motivate the
subordinate to carry out what they wantso that a directing function is needed to efficiently
and effectively allocate economic resources. At the time of delegation of authority from
superordinate to subordinate, irregularities/corruptions often occur,thus requiring an early
warning system to be able to detect irregularities as quickly as possible by subordinates/
employees.
Furthermore, an applied theory is used because of problems between agents and
principals, such as moral hazard and adverse selection (Eisenhardt, 1989), which must be
resolved by creating a governance structureexpected to monitor and assess the behavior of
agents and the payment of incentivecompensation for high performance. Shifting risk to the
agent motivates them to behave following the principal’s interests (Donaldson and Davis,
1991). As the first applied theory, management theory (Jones and George, 2016) explains
Figure 1.
Conceptualmodel of
the study
JFC
31,2
378
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