Earnings Management on New Fraud Diamond and Financial Statement Fraud in Indonesian Infrastructure Firms

Nicko Albart; Almatius Setya Marsudi

doi:10.37641/jimkes.v13i4.3451

Authors

Nicko Albart Universitas Katolik Indonesia Atma Jaya, Indonesia
Almatius Setya Marsudi Universitas Katolik Indonesia Atma Jaya, Indonesia

DOI:

https://doi.org/10.37641/jimkes.v13i4.3451

Keywords:

Earnings Management, Financial Statement Fraud, Infrastructure Companies, Infrastructure Sector, New Fraud Diamond

Abstract

Financial statement fraud in Indonesia’s infrastructure sector poses significant risks due to complex accounting practices. The New Fraud Diamond framework offers a robust approach to detecting fraud, but its application in this context, moderated by earnings management. This study investigates the direct effects of financial stability, financial targets, monitoring effectiveness, earnings growth, and change in directors on financial statement fraud, and examines earnings management’s moderating role. Using panel data regression and Moderated Regression Analysis, we analyzed 90 firm-year observations from 15 IDX-listed infrastructure firms (2018–2023). The Beneish M-Score measured fraud, while proxies like financial stability and Return on Assets captured independent variables. Financial stability and earnings growth significantly increase fraud risk (p < 0.050), while monitoring effectiveness unexpectedly worsens it. Earnings management strengthens these relationships for stability and growth. The New Fraud Diamond model, enhanced by Moderated Regression Analysis, effectively detects fraud in Indonesian infrastructure firms. Strengthened governance is needed to address monitoring weaknesses. Future research should explore additional fraud predictors.

Downloads

Download data is not yet available.

References

Ajekwe, C. C. (2021). Impact of flexibility in accounting on financial reporting. European Journal of Accounting, Auditing and Finance Research, 9(3), 74-87.

Al-Okaily, J., & BenYoussef, N. (2020). Audit committee effectiveness and non-audit service fees: Evidence from UK family firms. Journal of International Accounting, Auditing and Taxation, 41(1), 100-136.

Al-Shattarat, B., Hussainey, K., & Al-Shattarat, W. (2023). Earnings management in construction firms: Evidence from the UK. Construction Management and Economics, 41(5), 423–439.

Association of Certified Fraud Examiners (ACFE). (2024). Occupational fraud 2024: A Report to the Nations. Retrieved September 23, 2024, form https://www.acfe.com/-/media/files/acfe/pdfs/rttn/2024/2024-report-to-the-nations.pdf

Ball, R. (2009). Market and political/regulatory perspectives on the recent accounting scandals. Journal of accounting research, 47(2), 277-323.

Barbosa, F., Woetzel, J., & Mischke, J. (2017). Reinventing construction: A route of higher productivity. New York: McKinsey Global Institute.

Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Neal, T. L. (2022). Fraudulent financial reporting: An update on SEC enforcement trends. Journal of Accountancy, 234(4), 1–10.

Budiman, J., & Setiawan, M. A. (2023). Earnings management and financial statement fraud in Indonesian infrastructure firms: A panel data approach. Asian Journal of Accounting Research, 8(2), 134–145.

Burgstahler & Dichev. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economic, 24(1), 99–126.

Chen, D., Li, S., & Xiao, S. (2021). Earnings management, fraud risk, and auditor responses: Evidence from China. Journal of International Accounting Research, 20(2), 63–78.

Chen, J., & Zhang, L. (2023). Corporate governance and fraud prevention in construction industries: Evidence from China. Journal of Business Ethics, 185(4), 821–836.

Cressey, D.R. (1950). The criminal violation of financial trust. American Sociological Review, 15(6), 738-743.

Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011). Predicting material accounting misstatements. Contemporary accounting research, 28(1), 17-82.

Dechow, P. M., S. R. G., & S. A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193–225.

El Diri, M., Lambrinoudakis, C., & Alhadab, M. (2020). Corporate governance and earnings management in concentrated markets. Journal of Business Research, 108(1), 291–306.

Farber, D. B. (2005). Restoring trust after fraud: Does corporate governance matter? The accounting review, 80(2), 539-561.

Fitriyanto, D., & Triyono. (2025). Analysis of financial reporting fraud with fraud hexagon theory in financial companies in the banking sub-sector in 2020-2022. Jurnal Ilmiah Manajemen Kesatuan, 13(1), 495–506.

Frankel, T. (2005). Trust and honesty: America's business culture at a crossroad. Oxford: Oxford University Press.

Gao, Y., Kim, J.-B., Tsang, D., & Wu, H. (2017). Go before the whistle blows: an empirical analysis of director turnover and financial fraud. Review of Accounting Studies, 22(1), 320–360.

Gbegi, D., & Adebisi, J. (2013). The new fraud diamond model-how can it help forensic accountants in fraud investigation in Nigeria? European Journal of Accounting Auditing and Fiancé Research, 1(4), 129–138.

Ghafran, C., & O'Sullivan, N. (2013). The governance role of audit committees: Reviewing a decade of evidence. International Journal of Management Reviews, 15(4), 381-407.

Ghozali, I. (2018). Aplikasi Analisis Multivariate dengan Program IBM SPSS 25 (9th ed.). Semarang: Badan Penerbit Universitas Diponegoro.

Jensen, M. C., & M. W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.

Khamainy, A. H., Ali, M., & Setiawan, M. A. (2022). Detecting financial statement fraud through new fraud diamond model: the case of Indonesia. Journal of Financial Crime, 29(3), 925–941.

Labban, M. (2014). Against value: Accumulation in the oil industry and the biopolitics of labour under finance. Antipode, 46(2), 477-496.

Li, Y., Li, X., Xiang, E., & Geri Djajadikerta, H. (2020). Financial distress, internal control, and earnings management: Evidence from China. Journal of Contemporary Accounting and Economics, 16(3), 210-236.

Liu, T., Abdelbaky, A., Elamer, A. A., & Elmahgoub, M. (2023). Real earnings management and ESG disclosure in emerging markets: The moderating effect of managerial ownership from a social norm perspective. Heliyon, 9(12), 2812-2832.

Moscariello, N., Fera, P., & Cinque, E. (2020). The information content of discretionary accruals during systemic crises. Journal of Applied Accounting Research, 21(3), 455-476.

Narsa, N. P. D. R. H., Afifa, L. M. E., & Wardhaningrum, O. A. (2023). Fraud triangle and earnings management based on the modified M-score: A study on manufacturing company in Indonesia. Heliyon, 9(2), 636-649.

Pratama, A., Susanto, Y., & Widjaja, A. (2021). Board changes and financial performance: Evidence from Indonesian listed firms. Cogent Business & Management, 8(1), 198-216.

Pudjiastuti, W., Tjahjani, F., Pratikasari, N. A., & Bunyamin, B. (2022). Earning Management Effect on Financial Statement Fraud, with Corporate Governance as a Moderating Variable. International Journal of Economics, Business and Accounting Research (IJEBAR), 6(3), 2099-2108.

Putra, R. N. A., & Sari, C. N. (2023). New fraud diamond dan deteksi kecurangan financial statement pada perusahaan manufaktur yang terdaftar Di ISSI. Jurnal Akuntansi Dan Audit Syariah (JAAiS), 4(2), 175–193.

Rahayu, S., & Widodo, T. (2022). Limitations of earnings management detection models in emerging markets. Journal of Accounting in Emerging Economies, 12(3), 567–582.

Rezaee, Z. (2005). Causes, consequences, and deterence of financial statement fraud. Critical perspectives on Accounting, 16(3), 277-298.

Sari, R., & Nugroho, P. (2020). Financial targets and compliance in Indonesian firms: A post-PSAK 72 analysis. International Journal of Finance & Banking Studies, 9(4), 45–58.

Susanti, W., & Nugrahanti, Y. (2021). Fraud detection in high-growth firms: A New Fraud Diamond perspective. Journal of Financial Reporting and Accounting, 19(5), 789–805.

Svabova, L., Kramarova, K., Chutka, J., & Strakova, L. (2020). Detecting earnings manipulation and fraudulent financial reporting in Slovakia. Oeconomia Copernicana, 11(3), 485–508.

Tyasningwuri, E., Khoirunnisa, I., Salsabila, N., Fatin, N., Damayanti, D., & Manurung, H. (2023). Fraudulent practices and the implications for corporate accountability: a qualitative analysis at PT Tiga Pilar Sejahtera Food Tbk. Jurnal Ilmiah Manajemen Kesatuan, 11(3), 763–768.

Vousinas, G. L. (2019). Advancing theory of fraud: the S.C.O.R.E. model. Journal of Financial Crime, 26(1), 372–381.

Wahyuni, E. S., Karpriana, A. P., & Indah, D. P. (2024). The effect of financial performance and good corporate governance on company value. Jurnal Ilmiah Manajemen Kesatuan, 12(5), 1795–1802.

Watts, R. L., & Zimmerman, J. L. (1990). Positive accounting theory: a ten year perspective. Accounting review, 65(1), 131-156.

Wijaya, H., & Putri, D. (2022). Independent commissioners and fraud risk in Indonesian infrastructure companies. Corporate Governance: The International Journal of Business in Society, 22(6), 1289–1304.

Willerton, J. P. (1992). Patronage and Politics in the USSR (No. 82). Cambridge: Cambridge University Press.

Wolfe, D. T., & Hermanson, D. R. (2004). The fraud diamond: Considering the Four Elements of Fraud. Retrieved July 16, 2004, from https://Www.Cpajournal.Com/2024/06/10/the-Fraud-Diamond/#google_vignette.

Zang, A. Y. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. The Accounting Review, 87(2), 675–703.

Zhang, X. F. (2007). Accruals, investment, and the accrual anomaly. The Accounting Review, 82(5), 1333-1363.