Invest in effective internal surveillance systems

Oct 13, 2025 by talynt.org 108 views

The Influence of External Pressure, Ineffective Monitoring, Managerial Ownership, and Auditor Opinion on Financial Statement Fraud in Manufacturing Companies Listed on the IDX in 2016-2018

Introduction

Financial statement fraud has become a significant concern for companies listed on the Indonesia Stock Exchange (IDX). The occurrence of financial statement fraud can lead to a loss of investor confidence, damage to a company's reputation, and even bankruptcy. In this study, we aim to investigate the influence of external pressure, ineffective monitoring, managerial ownership, and auditor opinion on financial statement fraud in manufacturing companies listed on the IDX during the 2016 to 2018 period.

Background

Financial statement fraud is a complex issue that involves various factors. External pressure, such as market competition and regulatory requirements, can influence a company's decision to engage in financial statement fraud. Ineffective monitoring, including weak internal controls and inadequate supervision, can create an environment conducive to fraud. Managerial ownership, including the level of ownership and involvement of top management, can also impact a company's likelihood of engaging in financial statement fraud. Finally, auditor opinion, including the quality and independence of the auditor, can play a crucial role in detecting and preventing financial statement fraud.

Research Methods

This study employed a quantitative approach using causal research design. The data used in this study were secondary data obtained from official sources, including the IDX website. The analysis technique used was logistical regression analysis with the help of SPSS 25 software. This method was chosen to understand the relationship between independent variables (external pressure, ineffective monitoring, managerial ownership, and auditor opinion) with dependent variables (financial statement fraud).

Research Results

The results of this study showed that not all factors studied had a significant effect on financial statement fraud. External pressure and managerial ownership apparently did not have a significant effect on financial statement fraud. This indicates that both may not affect the manager's decision to engage in financial statement fraud, which can also be caused by the level of awareness of ethics that begins to increase in the industry.

Conversely, ineffective supervision and auditor's opinion found a significant effect on financial statement fraud. This shows that when internal supervision in the company does not go well, there is a greater opportunity for managers to commit fraud. Likewise, the auditor's opinion plays an important role as an indicator of trust in the market. If the auditor gives a less favorable opinion, the potential for fraud can increase.

Analysis and Implications

The absence of significant effects of external pressure and managerial ownership on financial statement fraud may reflect that these companies operate on better ethical standards than before. This could be a positive signal for stakeholders that companies began to better maintain the integrity of their financial statements. However, the supervision and approval function of the auditor plays a crucial role. Weaknesses in internal supervision can create gaps for fraud practices, which must be watched out by management.

It is essential for companies to invest more in effective internal surveillance systems and pay attention to the quality of auditor opinion. By involving trusted independent auditors and strengthening internal supervision, the company can minimize the risk of disadvantage that both reputable and financially.

Conclusion

This study provides a deeper understanding of the factors that influence the fraud of financial statements, as well as emphasizing the need for more attention to internal supervision and the selection of auditors to maintain the financial integrity of the company in the shade of the Indonesia Stock Exchange. The findings of this study have implications for companies listed on the IDX, as well as for regulatory bodies and auditors. By understanding the factors that influence financial statement fraud, companies can take proactive steps to prevent and detect fraud, and maintain the trust of their stakeholders.

Recommendations

Based on the findings of this study, we recommend that companies listed on the IDX:

Invest in effective internal surveillance systems: Companies should invest in robust internal controls and supervision systems to prevent and detect financial statement fraud.
Pay attention to the quality of auditor opinion: Companies should select auditors who are independent, experienced, and have a good reputation.
Strengthen internal supervision: Companies should ensure that internal supervision is effective and that weaknesses in internal supervision are addressed.
Maintain transparency and accountability: Companies should maintain transparency and accountability in their financial reporting and ensure that their financial statements are accurate and reliable.

By following these recommendations, companies can minimize the risk of financial statement fraud and maintain the trust of their stakeholders.

Limitations of the Study

This study has several limitations. Firstly, the study used secondary data, which may not be comprehensive or up-to-date. Secondly, the study focused on manufacturing companies listed on the IDX, which may not be representative of all companies listed on the IDX. Finally, the study used logistical regression analysis, which may not capture the complexity of the relationships between the independent variables and the dependent variable.

Future Research Directions

This study provides a foundation for future research on financial statement fraud. Future studies can build on this study by:

Investigating the impact of external pressure on financial statement fraud: Future studies can investigate the impact of external pressure, such as market competition and regulatory requirements, on financial statement fraud.
Examining the role of managerial ownership in financial statement fraud: Future studies can examine the role of managerial ownership, including the level of ownership and involvement of top management, in financial statement fraud.
Analyzing the effect of auditor opinion on financial statement fraud: Future studies can analyze the effect of auditor opinion, including the quality and independence of the auditor, on financial statement fraud.
Investigating the impact of internal supervision on financial statement fraud: Future studies can investigate the impact of internal supervision, including the effectiveness of internal controls and supervision systems, on financial statement fraud.

By building on this study, future research can provide a more comprehensive understanding of the factors that influence financial statement fraud and provide recommendations for companies, regulatory bodies, and auditors to prevent and detect fraud.
Frequently Asked Questions (FAQs) on Financial Statement Fraud

Q: What is financial statement fraud?

A: Financial statement fraud refers to the intentional misrepresentation or omission of financial information in a company's financial statements, with the goal of deceiving stakeholders, such as investors, creditors, or regulatory bodies.

Q: What are the common types of financial statement fraud?

A: Common types of financial statement fraud include:

Revenue recognition: Misrepresenting revenue or sales to inflate earnings.
Asset misstatement: Misrepresenting the value or existence of assets, such as inventory or property.
Expense misstatement: Misrepresenting expenses or liabilities, such as accounts payable or accounts receivable.
Off-balance-sheet transactions: Hiding liabilities or expenses in off-balance-sheet transactions.

Q: What are the consequences of financial statement fraud?

A: The consequences of financial statement fraud can be severe, including:

Loss of investor confidence: Financial statement fraud can lead to a loss of investor confidence, resulting in a decline in stock price and a decrease in investor interest.
Regulatory penalties: Companies found guilty of financial statement fraud may face significant regulatory penalties, including fines and imprisonment.
Damage to reputation: Financial statement fraud can damage a company's reputation, making it difficult to attract new investors, customers, or employees.
Bankruptcy: In extreme cases, financial statement fraud can lead to bankruptcy, resulting in the loss of jobs, assets, and shareholder value.

Q: What are the warning signs of financial statement fraud?

A: Warning signs of financial statement fraud include:

Unusual or unexplained transactions: Transactions that are unusual or unexplained, such as large cash payments or transfers to related parties.
Inconsistencies in financial statements: Inconsistencies in financial statements, such as discrepancies in revenue or expense recognition.
Lack of transparency: A lack of transparency in financial reporting, such as failure to disclose related-party transactions or off-balance-sheet arrangements.
Unusual or unexplained changes in financial performance: Unusual or unexplained changes in financial performance, such as sudden increases in revenue or decreases in expenses.

Q: How can companies prevent financial statement fraud?

A: Companies can prevent financial statement fraud by:

Implementing effective internal controls: Implementing effective internal controls, such as segregation of duties and regular audits.
Providing training and education: Providing training and education to employees on financial reporting and internal controls.
Encouraging a culture of integrity: Encouraging a culture of integrity, where employees feel comfortable reporting suspicious transactions or behavior.
Regularly reviewing and updating financial reporting: Regularly reviewing and updating financial reporting to ensure accuracy and transparency.

Q: What role do auditors play in preventing financial statement fraud?

A: Auditors play a critical role in preventing financial statement fraud by:

Conducting regular audits: Conducting regular audits to ensure the accuracy and completeness of financial statements.
Identifying and reporting suspicious transactions: Identifying and reporting suspicious transactions or behavior to management and regulatory bodies.
Providing guidance and recommendations: Providing guidance and recommendations to management on internal controls and financial reporting.
Maintaining independence and objectivity: Maintaining independence and objectivity in their audit work to ensure that they are not influenced by management or other stakeholders.

Q: What are the consequences of auditor failure to detect financial statement fraud?

A: The consequences of auditor failure to detect financial statement fraud can be severe, including:

Loss of reputation: Auditors who fail to detect financial statement fraud may suffer a loss of reputation, making it difficult to attract new clients or maintain existing relationships.
Regulatory penalties: Auditors who fail to detect financial statement fraud may face regulatory penalties, including fines and disciplinary action.
Civil liability: Auditors who fail to detect financial statement fraud may face civil liability, including lawsuits and damages.
Professional discipline: Auditors who fail to detect financial statement fraud may face professional discipline, including suspension or revocation of their license.