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Detection Fraud of Financial Statement With Fraud Triangle: November 2013
Detection Fraud of Financial Statement With Fraud Triangle: November 2013
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1.1 Introduction
Financial reporting beneficial for most of the users of financial statements in
order to make economic decisions and demonstrate accountability over user
management resources in resource-power entrusted to them (Indonesian Institute of
Accountants, 2009). In financial reporting mechanisms, an audit is designed to
provide assurance that the financial statements are not affected by the misstatement
(Mistatement) the material and also provide reasonable assurance on the
accountability of the asset management company.
_____________________________________
“Daniel T. H. Manurung, SE.,Ak.,MSA, Accounting and Auditing. Widyatama University, East Java,
Bandung : [email protected]
“Niki Hadian, SE.,MM.,Ak., Accounting and Finance. Widyatama University, East Java, Bandung,
[email protected]
Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
In addition, the damage caused by acts of fraud beyond direct financial loss.
Such damage includes adverse external business relationships, employee morale,
reputation and branding firm (PriceWaterhouseCoopers, 2003). Besides the
increasing incidence of fraud, but the work done by the organization to combat fraud
action does not run smoothly and the only formality (Andersen, 2004).
One of the reasons that entities of all types take steps - more and different
measures to counter fraud measures are red flags approach is considered to be
ineffective, because it is well-known approach involves the use of a list of indicators
of fraudulent actions. Red flags do not foresee any act of fraud, but it is a condition
associated with cheating. Red flags that signal meant to alert the auditor to the
possibility of fraud action activity. Many commentators doubted red flags because of
two limitations (Krambia-kardis, 2002):
1. Red flags associated with the act of cheating, but can’t reveal the exact (not
showing genuine relationship), and
2. Because it focuses attention on a particular sign of red flags may hinder internal
auditors and external auditors of identification reason - another reason that the act
of cheating can occur (Krambia-Kardis, 2002).
The Problems often arise from some of the above cases to be a big question for
the performance of an auditor: why external auditors failed to detect financial
reporting fraud in some cases like the above example? An auditor who served in the
audit of the financial statements of these companies should be run tasks
procedurally proper internal controls and supervision (Internal Quality Control) to
prevent the occurrence of a material misstatement in the decision, including the
detection of fraud then there is no harm cases Here you are.
According to the theory of Cressey (cited by Skousen et al, 2009), there are three
conditions that are always present in the acts of fraud that pressure, opportunity and
rationalization called fraud triangle. The third condition is a risk factor for the
emergence of fraud in a variety of situations. Berbgaia findings of fraud risk factors
by Cressey (1953) is based on a series of interviews with people who are convicted
of experience (Skousen et al, 2009).
Until now research on fraud auditing is still a bit done. Based on the above, this
research is intended to detect financial statement fraud fraud triangle perspective of
this research is to detect fraudulent financial statement fraud triangle perspective is
still very rare in Indonesia. The problem in this study is formulated in the form of
penetlitian questions: 1) whether the financial stability variables can be used to
detect financial statement fraud?., 2) whether the target variable can be used to
detect financial fraud., 3) whether the target variable can be used to detect financial
fraud financial statements?., 4) whether the variable ineffectiveness monitoring can
be used to detect financial statement fraud?
Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
Jensen and Meckling (1976) stated that the agency relationship is a contract
between the manager (agent) with the owner (principal). Agency relationship arises
when one or more persons (the principal) employs another person (agent) to provide
a service and then delegate decision-making authority to the agent is morally
responsible for optimizing the benefits of the owners (principal), but on the other
managers also have interests maximize their welfare (Ujiyanto & Pramuka, 2007).
Conflict of interest or the difference of interest between principal and agent is what
can lead to agency problems that can affect the quality of reported earnings.
2.2 Fraud
Fraud is, as well as errors and irregularities masung translated their mistakes
and irregularities. Difference of deviation and error is whether the underlying action,
whether the action is a deliberate act or not. Fraud or irregularities do with the
element of intent in doing so. ACFE's defines fraud as an intentional act of taking
profit by abusing a position / title or steal assets / resources within the organization
(Singleton, 2010).
According Albretch and Albrecth (in, Nguyen, 2008), fraud is classified into five types
is:
1. Embezzlement Employee or Occupational Fraud:
Is a type of fraud committed by subordinates to superiors. This type of fraud done
by the staff with cheating on his boss directly or indirectly.
2. Management Fraud
Is a type of fraud committed by top management to shareholders, creditors and
other parties who rely on the financial statements. This type of fraud is done by
providing top management misrepresentation, usually on financial information
3. Investment Scams
Is a type of fraud committed by the individual / individuals to investors. This type of
fraud is done by tricking or deceiving investors with a way to invest their money in
investments
4. Vendor Fund
Is a type of fraud committed by organizations or individuals that sell goods or
services to the organization or company that sells goods or services. This type of
fraud is done by placing the organization exorbitant prices for goods and services
or the lack of delivery of the goods even though payment has been made.
5. Customer Fund
Is a type of fraud is carried out by the customer to the organization or company
that sells goods or services. This type of fraud is done lying to customers by way
of the seller to deliver to customers who are not supposed to or accuse the seller
delivers less than it should.
Fraud triangle theory is an idea to investigate the causes of fraud. This idea was first
coined by Donald R. Cressey (1953) called the fraud triangle or triangle cheating.
Cressey (1953) in gagola (2011) concluded that:
Fraud triangle describes three factors that are present in every situation of fraud:
1. Pressure , incentives / pressures / needs to do fraud . Pressure can include
almost anything including lifestyle , economic demands , and others - others
include financial and non-financial terms .
According to SAS No. . 99 , there are four common types of conditions on the
pressure that can lead to cheating . The condition is financial stability , esternal
pressure , personal financial need and financial targets
2 .Opportunity , the situation is an opportunity to allow some cheating going on .
Opportunities created by the internal control weaknesses . Of three fraud risk
factors (pressure , opportunity and rationalization ) , chances are the basic things
Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
Incentive / Pressure
Opporunity Rationalization
Source: Fraud Triangle Theory Oleh Cressey (1953)
Elliot and Willingham (in Intal and Do, 2002), defines financial statement fraud
from a different perspective. According to him, financial statement fraud is a fraud
management, namely, "the deliberate fraud committed injuries that investors and
creditors throu misleading materiality". Thus, the term fraud management and
financial statement fraud are often used interchangeably, but in general, fraud is a
deliberate act to harm others.
Financial reporting which contain elements of fraud can lead to decline in the
integrity of financial information and may affect various parties. In addition to
investors and creditors, auditors are a victim of financial statement fraud because
they may suffer financial loss and / or loss of reputation (Rezae, 2002). Therefore,
the auditor must understand the ways taken by certain parties in the practice of
financial statement fraud.
Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
Various facts and theories that have been described above indicate that there
is a close relationship between earnings management and financial statement is
reinforced by fraud.Pernyataan Rezae (2002) which states that:
"A financial statement fraud often begins with the misstatement of earnings
management or financial statements that are considered not material but
eventually developed into a large-scale fraud and produce annual financial
statements materially misleading"
Based on the description above, it is relevant when the study to detect financial
statement fraud is proxied by earnings management by the company because they
have quality.
Research on fraud is still a little done. The following are some examples of
research related to fraud:
Intal and Do (2002) conducted a study that aims to identify the reasons why the
auditor is unable to detect financial statement fraud. The research method is done by
analyzing the case of financial statement fraud in particular on the issue of revenue
recognition. Technical terms, it can be concluded the reason why the auditor is
unable to detect financial statement fraud is because it can not provide adequate
audit evidence and the strong, weak audit risk model and risk assessment of internal
control and audit failures in the revenue recognition and disclosure of transactions
with third parties. From an ethical perspective, factors related to the failure of
auditors to detect financial statement fraud is the independence of the audit and the
amount of non-audit services provided by auditors.
Skousen et al . (2009 ) make the detection of fraud using the fraud triangle
analysis . The study aims to assess the effectiveness of the theory of Cressey (
1953) about the fraud risk factor framework implemented in SAS No. 99 to detect
financial statement fraud . Skousen et al (2009 ) developed a variable that serves as
a proxy measure for pressure , opportunity and rationalization. The research
identified five pressures and two proxies proxy opportunities are significantly
associated with cheating . The results showed that rapid asset growth , increased
Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
need for cash and external financing is positively related to the likelihood of fraud .
Furthermore , internal and external ownership and control of the board of directors is
also associated with an increase in financial statement fraud . In addition , he also
discovered that the expansion of the number of independent members on the audit
committee negatively associated with the occurrence of fraud .
Financial stability
Financial Target
Financial Statement
Fraud
Innefective Monitoring
External Pressure
Normality test aims to test whether the regression model or residual confounding
variable has a normal distribution (Ghozali, 2005). As it is known that the t and F test
assumes that the residuals follow a normal distribution. If this assumption is violated, the
statistical test to be invalid for a number of small samples. There are two ways to detect
Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
whether the residuals are normally distributed or not that is the graph analysis and statistical
tests. This study uses the second test to test the normality of the data.
a. If the data is spread around the diagonal line and follow the direction of the diagonal line,
then the regression model to meet the assumption of normal
b. If the data is spread far and dri diagonal lines or do not follow the diagonal line, then the
regression model did not meet the assumption of normality.
Multikolonieritas test aims to test whether the regression model found a correlation
between the independent variables (independent). Good regression models should not occur
in the correlation between the independent variables (Ghozali, 2005). One to determine the
presence / absence of multicollinearity are using the Variance Inflation Factor (VIF) and
tolerance. The second shows the size of each independent variable Which explained by
other independent variables. Tolerance measures the variability of the selected independent
variables that are not explained by the other independent variables. So a low tolerance value
equal to the value of high VIF (as VIF = 1/Tolerance). Criteria decision making with tolerance
and VIF values are as follows:
1.If the tolerance value ≥ 0.10 or ≤ 10 VIF value, meaning not happen multicollinearity
2. If the tolerance value ≤ 0.10 or VIF values ≥ 10, there is a multicollinearity.
Autocorrelation test aims to test whether the linear regression model is no correlation
between the error in period t with bullies bully error in period t - 1 ( previous ) , ( Ghozali ,
2005) . If there is no correlation eating problem called autocorrelation . Autorkorelasi arise
because successive observations over time are related to each other . This problem arises
because the residuals ( errors bullies ) are not independent from one observation to another
observation
Criteria Durbin Watson test as follows :
1 . When the value of DW is located between the upper limit or upper bound ( du ) and ( 4 -
du ) , then the autocorrelation coefficient = 0 , so that there is no autocorrelation
2. When the DW value is lower than the lower limit or the lower bound ( dl ) , the
autocorrelation coefficient > 0 , so that there is a positive autocorrelation
3. When the value is greater than the DW ( 4 - dl ) , then the autocorrelation coefficient < 0 ,
so there is negative autocorrelation
4. When the value of DW is located between the upper limit ( du ) and lower limit ( dl ) or
DW lies between ( 4 - du ) and ( 4 - dl ) , the results are inconclusive .
Heterosdastisitas test aims to test whether the regression model of the residual
variance occurs inequality a another observation to observation. If the residual variance from
one observation to another observation remains, then it is called and if different
homoskedastisitas called heteroscedasticity (Ghozali, 2009). Regression models is that
homokesdasitas good or not happen heteroscedasticity.
Percentiles
Based on P-Plot view (Figure 4.1) it can be concluded that the dots spread
between the diagonal lines, as well as the spread following the direction of the
diagonal line. While the histogram chart provides approximately normal distribution
pattern. Thus, we can conclude the normal chart and graph a histogram plot shows
that the regression model could be used because the assumption of normality.
SPSS output of the histogram graph display shows that histogram chart shows
the pattern of a normal distribution, then the regression model to meet normality
(Ghozali, 2009:147).
This test aims to test whether the regression model found a correlation between the
independent variables or independent. The regression models should not happen correlation
between the independent variables. The following table shows the test results of
multicollinearity:
Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
Coefficientsa
Standardi
zed
Unstandardized Coefficie 95% Confidence Interval Collinearity
Coefficients nts for B Correlations Statistics
Model B Std. Error Beta t Sig. Lower Bound Upper Bound Zero-order Partial Part Tolerance VIF
1 (Constant) -2.573E11 3.039E11 -.847 .404 -8.780E11 3.633E11
AGROW -3.189E10 7.354E10 -.081 -.434 .668 -1.821E11 1.183E11 -.045 -.079 -.078 .940 1.064
ROA 4.930E11 8.813E11 .124 .559 .580 -1.307E12 2.293E12 .044 .102 .101 .667 1.499
LEV 2.968E11 3.884E11 .164 .764 .451 -4.964E11 1.090E12 .089 .138 .138 .705 1.418
BDOUT -3.520E10 4.204E11 -.017 -.084 .934 -8.937E11 8.233E11 -.009 -.015 -.015 .759 1.318
a. Dependent Variable:
EAM
Based on table 4.2 multikolonieritas test results can be seen through the Variance
Inflation Factor (VIF) of each independent variable has no more than 10 VIF and
tolerance values> 0.1, then it can be declared multiple linear regression model is free
from assumptions multikolonieritas.
Table 3
b
Model Summary
Change Statistics
Adjusted R Std. Error of the R Square Sig. F
Model R R Square Square Estimate Change F Change df1 df2 Change Durbin-Watson
a
1 .154 .024 -.106 4.438E11 .024 .182 4 30 .946 1.906
a. Predictors: (Constant), BDOUT, AGROW, LEV,
ROA
b. Dependent Variable: EAM
Based on the results of testing for symptoms of autocorrelation in Table 5.3 above,
the value of DW-count of 1,906. it can be concluded there is no autocorrelation.
Heterosdastisitas test aims to test whether the regression model of the residual
variance occurs inequality one observation to another observation. Regression
models is that good or not happen Heteroskidastity homoskedastisitas (Ghozali,
2009). Here is a picture of SPSS output for test Heteroskidastity.
Proceedings of 23rd International Business Research Conference
18 - 20 November, 2013, Marriott Hotel, Melbourne, Australia, ISBN: 978-1-922069-36-8
SPSS output of the display models summary, the magnitude of the adjusted R2
is -0.106, meaning -10.6% variation fraudulent financial reports can be explained by
the variation of all four (4) independent variables (stabiltias finance, financial target,
financial effectiveness and external pressure ).
Rate coefficient (R) on the table, was 0.024, indicating that the relationship
between the dependent and independent variables is quite strong because it has a
correlation coefficient above 0.50. Standard Error of Estimate (SEE) of 4.438 E11,
the smaller the value of SEE will make the appropriate regression model to predict
the dependent variable.
Detecting financial statement fraud with the perspective of the fraud triangle
financial stability, financial targets, and external pressures are good, proven
simultaneously have a positive impact on the financial statements whereas
deception financial effectiveness in proksikan with the commissioners have a
negative impact on the financial statements fraud proxied by earnings management.
These results are consistent with studies Skousen et.al (2009) that one proksinya
the effectiveness of financial risk proxied by the commissioners board with an
increased incidence of fraud in the financial statements
References
Diakses: http://www/coso/org/document/COSOFRAUDSTUDY2010_001.pdf