Fraudulent Financial Statement Detection: Testing The Fraud Octagon Theory

Abstract

Fraud in financial statements can occur through deliberate misrepresentation of financial information through monetary units, falsification of transaction documents, non-compliance with accounting principles, or the omission of certain financial items in the presentation of financial statements. Fraud can occur in a company due to several underlying factors. While research on fraud has been continuously developed, inconsistencies remain between research results. Furthermore, there is a gap in previous literature, with theoretical perspectives used to explain fraud varying widely, ranging from the fraud triangle, fraud diamond, fraud pentagon, to fraud heptagon. According to the Association of Certified Fraud Examiners (ACFE) release entitled Asia-Pacific Occupational Fraud 2022 Indonesia ranked fourth in the country with the highest number of fraud cases in 2022, with losses reaching Rp 242.26 billion, recorded in 23 cases. The biggest frauds in Indonesia are corruption (64 percent), misuse of state and corporate assets (28.9 percent), and financial statement fraud (6.7 percent). Although the percentage of financial statement fraud is small, the losses incurred are quite large, averaging over ten billion rupiah. A survey by the Association of Certified Fraud Examiners & Association of Certified Fraud Examiners (2020) found that the total loss due to fraud cases in Indonesia in 2019 was IDR 873.43 million, with an average of more than IDR 7 million per case and around 38.5% of cases were fraud with losses exceeding IDR 1 million. This is a case of fraudulent financial statements (ACFE Indonesia, 2020). The novelty of this study is the examination of fraud using the Octagon theory approach, whereas previous studies used the fraud triangle, fraud diamond, fraud pentagon, and heptagon theory. This study adds the factors of technology, supervision, and punishment, which are integrated factors of the Octagon theory. The purpose of this study is to detect fraudulent financial statements using various factors, namely pressure, opportunity, rationalization, competence, arrogance, culture, religiosity, and technology. The objects studied were 936 companies from all manufacturing sectors listed on the Indonesia Stock Exchange (IDX) for the 2014-2023 period. The sampling technique used purposive sampling. Data analysis used SPSS.