Abstract
The purpose of this study was to analyze the prediction of fraudulent financial reporting with the perspective of pentagon fraud. Pentagon fraud theory is the development of the theories of fraud triangle and fraud diamond. The Pentagon fraud theory adds an element of arrogance in addition to the other four existing elements namely pressure, opportunity, rationalization, and competence or capacity. The population in this study were 157 manufacturing companies listed on the Indonesia Stock Exchange (IDX) period 2013-2015. The samples of 46 companies were obtained by using purposive sampling technique, so the analysis unit was 138. Data was analyzed by using descriptive statistical analysis and logistic regression analysis. The test result showed that financial stability, the quality of external auditor, and the number of CEOs photos in the annual reports of the companies had a positive effect on the prediction of fraudulent financial reporting, while financial targets, liquidity, institutional ownership, monitoring effectiveness, replacement of external auditors, and changes of corporate directors had no significant effect on the prediction of fraudulent financial reporting. The conclusion of this study indicates that unstable financial condition, the quality of corporate audit and the level of CEO's arrogance can influence the occurrence of fraudulent financial reporting.
Highlights
Financial statements are a means of communication used by a company externally and internally to provide information about the corporate activities over a certain period of time
This study aims to analyze the determinants of fraudulent financial reporting through the pentagon fraud approach which consisted of elements pressure with variables of financial targets, financial stability, liquidity, institutional ownership; element of opportunity with variable of effective monitoring and quality of external auditor, element of rationalization with variable of changes in auditor; competence with variable of change of company directors; as well as element of arrogance with variable of frequent number of CEO’s picture
The population used in this study are all manufacturing companies listed in Indonesia Stock Exchange during 2013-2015 numbered 157 companies
Summary
Financial statements are a means of communication used by a company externally and internally to provide information about the corporate activities over a certain period of time. The function of financial statements for internal parties, in this case company’s management is as the basis for decision-making. The function of financial statements for external parties is to inform investors and creditors about the financial performance and condition of the company during a certain period. The financial statements aim to provide information concerning the financial position of an company that is beneficial to a large number of users in economic decision-making (Harahap, 2013). The importance of presenting financial statements for the survival of the company to make managers motivated to improve the performance of the company so that the existence of the company is maintained.
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