Fraudulent Financial Reporting and Fraud Pentagon: Case Study on Indonesia Stock Exchange

Abstract

This study aimed to determine the fraud pentagon elements that significantly predict fraudulent financial reporting (FFR) in public companies listed on the Indonesian Stock Exchange in the consumer sector in 2018-2020. The study population comprised 176 public companies in the consumer cyclical and non-cyclical sectors listed on the Indonesia Stock Exchange determined by purposive sampling. Therefore, this study was conducted on 78 public companies in the consumer cyclical and non-cyclical sectors. Accordingly, the data was collected from a sample of 59 FFR and 19 non-FFR companies classified using the M-Score. The data collected were analyzed using multiple logistic regression. The results showed that three elements of fraud pentagon significantly predict financial fraud reporting on public companies listed on the Indonesia Stock Exchange. The three predicting elements are arrogance by the frequent number of CEOs’ picture proxy, competence by undeclared policies on doubtful debts and accounts receivable, and rationalization by accounting policy proxy changes. Additionally, the changes in accounting policies proxy were the most significant predictor.