The Effect of Fraud Indicators and Financial Reporting Compliance on Earnings Quality and Stock Returns in ISSI Companies

Abstract

This study is motivated by the importance of earnings quality as an indicator of financial reporting credibility in primary consumer goods companies listed on the Indonesian Sharia Stock Index (ISSI), amid concerns over financial statement manipulation and information inconsistencies that may affect market responses. The study aims to examine the effect of fraud indicators and financial reporting compliance on earnings quality and their impact on stock returns. A quantitative approach was employed using SPSS version 30 with secondary data from 34 companies during the 2020–2024 period. The findings reveal that fraud indicators, including the depreciation index, Sales General and Administrative Expenses Index (SGAI), Total Accruals to Total Assets (TATA), and leverage, have no significant effect on either earnings quality. In contrast, financial reporting compliance has a positive and significant effect on earnings quality, while TATA also positively influences stock returns. These results suggest that improvements in financial information quality are primarily driven by reporting compliance and earnings quality rather than accrual-based manipulation indicators, highlighting the importance of corporate governance and transparency in Islamic capital markets. The study implies that investors and regulators should place greater emphasis on compliance and earnings quality in decision-making and market supervision.