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Determinants of financial Determinants

of financial
statement fraud: the perspective statement
fraud
of pentagon fraud theory
(evidence on Islamic banking
companies in Indonesia) Received 30 January 2023
Revised 7 August 2023
13 October 2023
Sarwenda Biduri and Bambang Tjahjadi 10 December 2023
Accepted 5 March 2024
Department of Accounting, Faculty of Economic and Business,
Airlangga University, Surabaya, Indonesia

Abstract
Purpose – The purpose of this study was to determine the determinants of financial statement fraud: the
perspective of pentagon fraud theory.
Design/methodology/approach – This study used quantitative methods with an explanatory research
design by applying secondary data on Islamic banking companies listed on the Indonesia Stock Exchange (IDX).
Findings – External pressure affects financial statement fraud, ineffective monitoring affects financial statement
fraud, external auditor quality affects financial statement fraud, change in auditor affects financial statement fraud,
frequent number of CEO’s picture affects financial statement fraud, external pressure affects firm size, ineffective
monitoring affects firm size, external auditor quality affects firm size, change in auditor affects firm size, frequent
number of CEO’s picture affects firm size, firm size affects financial statement fraud, firm size mediates the relationship
between external pressure on financial statement fraud, firm size mediates the relationship between ineffective
monitoring on financial statement fraud, firm size mediates the relationship between external auditor quality and
financial statement fraud, firm size mediates the relationship between change in auditor and financial statement fraud,
firm size mediates the relationship between frequent number of CEO’s picture and financial statement fraud.
Research limitations/implications – The limitations of this research were found during the research
process and can be used as input for further research and related parties in conducting the research to obtain
better research results. The limitations of this study are as follows: this study only focused on Islamic
banking, so it cannot be generalized to other sectors. Besides, this study only tested five independent
variables, one dependent variable and one mediating variable.
Practical implications – For external auditors, financial statement fraud by management might be
caused by many factors and is a social as well as an economic problem that must be addressed immediately.
Therefore, in carrying out the duties and roles as an external auditor, they must have an attitude of
independence (not taking sides) in the mental attitude that must be maintained by the auditor related to the
assignment. Auditors must have sufficient technical expertise and training as auditors. In carrying out the
audit, the auditor should use their professional skills in responding carefully and thoroughly. Moreover, in
carrying out audit work, the auditor must have a plan, must know adequate internal control and obtain
sufficiently competent audit evidence.
Originality/value – To the best of the authors’ knowledge, very few studies in Indonesia have applied the
Beneish model. There is only one study that implemented the Beneish model, and the study examined only a
few companies listed on the IDX. The findings of the present study have important implications not only for
banks but also for users of financial statement accounts in Indonesia, especially for investors, auditors,
regulators, taxation and other state authorities.
Journal of Islamic Accounting and
Business Research
Keywords Financial empowerment, Pentagon fraud theory, Islamic banking companies © Emerald Publishing Limited
1759-0817
Paper type Research paper DOI 10.1108/JIABR-08-2022-0213
JIABR 1. Introduction
Financial statements are written records that must be prepared by a company or entity at
the end of each period. This is because financial statements have a fairly essential function
as it provides an overview of the financial position of a company and its performance in a
current period. Given the importance of financial statements for the survival of the
company, it is common for managers to do things to manipulate financial reports so that
the information looks good. This makes the financial statements irrelevant in describing the
actual state of the company and can harm its users.
Quality financial reports are transparent, complete, relevant, easy to understand and
have no element of fraud when published so that they can provide trust for the parties who
need the information, where the financial statements become the basis for making decisions
for them. However, the published financial statements sometimes do not have good quality
because there are often frauds committed by the company with their respective intentions.
Fraud is all forms of cunning ways committed by an individual to gain profit from
others, which can be in the form of deception, cunning, concealment and all unfair ways.
Fraud committed might cause harm to others in the form of material or non-material. Fraud
in Islam is one of the despicable acts that are prohibited because Islam always teaches its
people to always do good and avoid disgraceful acts, which is shown in Q.S. Al-Muthaffifiin
verses 1–3 below:
Woe to the defrauders! Those who take full measure ‘when they buy’ from people, but give less
when they measure or weigh for buyers. [Q.S Al-Muthaffifiin (83), pp. 1–3].
Although fraudulent financial reporting does not occur very often and has the smallest
percentage, it is the most detrimental form of fraud compared to others. A survey conducted
by ACFE in 2016 stated that the number of losses caused by fraudulent financial reporting
reached $1,000,000. A percentage of 40% of survey respondents think that the losses caused
by fraudulent financial reporting are more than IDR 10bn.
This loss is suspected to occur because fraudulent financial reporting in Indonesia has
not been widely disclosed due to the length of time and the lack of ability to detect
fraudulent financial reporting. This is because fraudulent financial reporting is often carried
out by the company’s internal parties so that it will be easy for them to cover up or hide the
fraud that they have committed.
A number of fraud cases occurred in the world throughout 2019. Even large companies,
such as Facebook and Google which are known to have good financial control, are also not
inseparable from fraud. In Indonesia, a number of cases of fraud occurred. One of the
fraudulent financial reporting occurred at PT. Garuda Indonesia (Persero) Tbk in 2018. It is
considered that the case began with a cooperation agreement between Mahata and PT
Citilink Indonesia which provided a profit of approximately US$239.9m. Previously, it was
stated in the agreement that Mahata would pay or bear all operational costs, including
maintenance costs for connectivity equipment, supply costs, operating costs and installation
costs. In fact, Mahata had not spent any for the previously agreed compensation. However,
the management recorded it in the financial statements as compensation income. Until the
financial statements were completed and PT Garuda Indonesia obtained a net profit, this
was actually suspected by those who participated in examining the financial statements
prepared by PT Garuda Indonesia, which were suspected of manipulating its financial
statements. In the end, the Indonesia Stock Exchange (IDX) issued a written sanction or
warning to PT Garuda Indonesia and a fine of 250 million to be paid. In addition, the
company was also asked to immediately revise its financial statements.
 Moreover, there are other cases of fraud in Indonesia as fraud may occur in various Determinants
industries, both the financial industry and the non-financial industry. Based on a report of financial
published by the Financial Services Authority, banking statistical data showed that 57
banks were indicated by fraud in Indonesia in 2017. Meanwhile, until the third quarter of
statement
2018, 36 banks were indicated by fraud. This is in accordance with the results of research fraud
conducted by ACFE which states that the financial and banking industries are the second
most harmed industry and fraud is the most common occurrence in such industries.
As reported in Liputan6.com, a 2019 report by AppsFlyer titled “Scams on the rise: How
bots and malware harm APAC Apps” stated that the fraud rate in Indonesia in the financial
sector reached 43.1% and was ranked second in ASEAN after Vietnam at 58.2%. This
indicates that fraud occurred frequently in Indonesia. In the banking industry, the most
common frauds are corruption, and misappropriation of assets, followed by fraudulent
financial reporting. However, fraudulent financial reporting contributed 75% loss,
corruption contributed 15% loss and misappropriation of assets contributed 10% loss. This
indicates that fraudulent financial statements are the fraud that causes the most losses
compared to corruption and misappropriation of assets.
One of the financial fraud cases that occurred in Indonesia was at PT Bank Bukopin Tbk
in 2017. There was fraudulent financial reporting in the form of manipulation of financial
report data on the income and credit card sector, where data on receipt of credit card income
at Bank Bukopin did not match reality. At least in the previous five years (2012–2017), there
were around 100,000 credit cards whose recordings were wrong. Moreover, data in the
financial statements stated that the bank earned income from the credit card business when,
in fact, it was not. The next case was experienced by BJB Syariah Bank in 2017, where there
was an allegation of fictitious credit involving the company’s permanent employees,
particularly the Acting President Director of BJB Syariah Bank to PT Hastuka Sarana
Karya with a loss of IDR 548bn during the 2014–2016 period. The fictitious credit
manipulation may result in the credit position and income increasing improperly in financial
statements.
Therefore, fraud in financial statements needs to be minimized so as not to harm any
related parties. Detection of financial statements is required to be carried out to find out
whether the company or entity is committing fraud. One of the detections can be done by
using the M-score model ratio analysis or what is often called the Beneish M-score model.
Beneish M-score model is a method that can be used to reveal the possibility of
fraudulent financial reporting committed by a company. Beneish M-score uses eight
financial ratios to detect fraudulent financial reporting. The ratio is calculated according to
the data in the company’s financial statements last year which is included in the formula
determined by the Beneish M-score method. If the number obtained from the calculation of
the Beneish M-score is higher than
2.22, it can be considered that the company is a part of
company groups that tend to manipulate its financial statements. However, if the number
obtained from the calculation of the Beneish M-score is lower than or equal to
2.22, the
company is included in company groups that do not manipulate its financial statements
(Simbolon, 2017).
Donald R. Cressey introduced the fraud triangle theory in 1953 when he conducted a
series of interviews with 113 people who had been convicted of embezzling corporate money.
In his concept, Cressey explains that three main components support or encourage an
individual to commit fraud, including pressure, opportunity and rationalization. Over time,
in 2004, in “The Fraud Diamond: Considering the Four Elements of Fraud”, (The CPA
Journal, December 2004), (Hermanson et al., 2000) added one element to the theory that
has been expressed by Cressey (1953), which is the capacity that is called the fraud
JIABR diamond theory. In 2011, Crowe Howard revealed the fraud pentagon theory. The fraud
pentagon theory is an extension of the previous fraud triangle theory proposed by Cressey
(1953). This theory adds two causes of fraud, consisting of competence and arrogance.
Several previous researchers have conducted research to detect fraud, especially
financial statement fraud. The researchers included Nilzam (2020), Ferica et al. (2019), Ulfah
et al. (2017), Aprilia (2017), Lindasari (2019) and Agusputri and Sofie (2019) . Referring to the
research that has been conducted, various factors allow the researchers to use them as a tool
to detect financial statement fraud, including financial stability, personal financial need,
external pressure, financial targets, ineffective monitoring, external auditor quality, change
in auditor, the frequent number of CEO’s picture, change in company accounting policy,
audit opinion, industry share ownership, change of directors and firm size. In his study,
Fuadin (2017) explained that several variables are considered inconsistent, including
financial stability, personal financial need, external pressure, ineffective monitoring,
financial targets, capability, change in auditor, nature of the industry and firm size.
In this study, the reference is the study conducted by Ulfah et al. (2017) which stated that
the financial target variable had no significant effect on financial statement fraud. This is
not in line with the research conducted by Lindasari (2019) and Agusputri and Sofie (2019)
which stated that the financial target variable had a significant effect on financial statement
fraud. Ulfah et al. (2017) said that the financial stability variable had no significant effect on
financial statement fraud, which was supported by several researchers, including Ferica
et al. (2019) and Agusputri and Sofie (2019) who also said in their research that the financial
stability variable did not affect financial statement fraud. In contrast, Aprilia (2017) stated
that the financial stability variable had a significant effect on financial statement fraud.
Nilzam (2020) stated that the external pressure variable had a significant effect on
fraudulent financial statements. The statement is different from research findings found by
Ulfah et al. (2017), Ferica et al. (2019), Aprilia (2017) and Agusputri and Sofie (2019) which
stated that the external pressure variable had no significant effect on fraudulent financial
statements. Venny Lindasari (2019) explained that the ineffective monitoring variable had a
significant effect on fraudulent financial statements which is in line with the study
conducted by Agusputri and Sofie (2019) which also stated that the ineffective monitoring
variable had a significant effect on fraudulent financial statements. However, this is
different from the research conducted by Ulfah et al. (2017), Ferica et al. (2019), Nilzam (2020)
and Aprilia (2017) which showed in their research that ineffective monitoring had no
significant effect on fraudulent financial statements. Some of these studies produced
different findings or results or found the presence of GAP in the research results. Based on
the phenomenon of GAP and research GAP explained in the research above, the researchers
are interested in developing and deepening this research with variables, research objects,
selection of periods and methods that are different from previous studies.
Prasetyo (2015) shared an opinion in his research that one way that can be used to detect
fraud in financial statements is by looking at the firm size. That is because, according to
him, a company that has assets in a fairly small amount can indirectly reduce the risk of
fraudulent financial statements and vice versa. Furthermore, research conducted by Watts
and Zimmerman (1986) proxied the firm size on the size of the political costs required by an
entity. Large companies always try to reduce their profits so that the tax that has been
determined on the company does not change. Indirectly, the company cheats on its financial
statements by deliberately deferring profits for future periods. Oppositely, a study
conducted by Septriani and Handayani (2018) argued that firm size had no effect on
fraudulent financial statements that occur in a company. The research stated that large or
medium-sized companies are not proven to be more aggressive in conducting earnings Determinants
management to avoid earning losses. of financial
In this study, the researchers used the fraud pentagon theory which has five main
components, including opportunity, pressure, rationalization, competence and arrogance.
statement
What distinguishes this study from previous studies includes: fraud
 the researchers conducted a study on fraud in the financial statements of companies
engaged in Islamic banking;
 the researchers also added a variable of firm size because, in several studies that
have been conducted, it is stated that one of the factors of fraud can be influenced by
the firm size;
 the researchers used the Beneish model as an analysis of the ratio calculation to
detect fraud in the financial statements; and
 in this study, the researchers used the partial least square (PLS) analysis method
which is often referred to as PLS as a measuring tool.

2. Theoretical background and review of literature

In 1976, Jensen and Meckling explained agency theory. They argued that agency theory is a
contract that involves more than one person which, in this case, can be called the
shareholders (principals) and management (agents) where the principals give authority or
delegate themselves to agents in terms of making the most appropriate and best decisions to
increase the profits of the shareholders (principals). The main purpose of agency theory is to
facilitate the relationship between the principal and agent which includes the design of the
contract that will be carried out by both parties. This is carried out to minimize
inappropriate information and uncertain circumstances in the future.
A company that implements a system of separation of functions between managers and
owners will bring up many differences between shareholders and managers. This happens
because, in carrying out their duties, a manager does not share the risk of what he has
decided. They think that all losses resulting from wrong decision-making are a risk to the
shareholders. Therefore, managers tend to make decisions that seem careless or not optimal.
In addition, the benefits that will be obtained by a company cannot be fully enjoyed by
managers, so managers tend to take actions to fulfill their interests which will certainly be
very detrimental to shareholders.
Fraud might happen because managers obtain opportunities/loopholes that can be
highly profitable for them but not for the principals. This is certainly done very neatly to
allow these actions to be undetected by the shareholders. Moreover, fraud may occur
because of pressure from the principal to the agent to maximize profits as much as possible.
This makes managers justify any means to fulfill the wishes of the shareholders without
thinking about the risks that will be borne in the future. Thus, according to Jensen and
Meckling (1976), a company needs to take into account costs to minimize agency problems
that exist in the company or are commonly referred to as agency costs. These costs are
divided into three aspects, including bonding costs, principal monitoring costs and residual
loss costs.

2.1 External pressure affects financial statement fraud

External pressure is excessive pressure for management to meet the requirements or
expectations of third parties. To overcome the pressure, companies need additional debt
or sources of external financing to remain competitive. The company’s ability to pay debts
JIABR or meet debt requirements is one source of external pressure. Additionally, managers may
also have pressure to obtain additional debt or capital (Ijudien, 2018).
Financial statement fraud occurs because the leverage owned by the company is very
high and the company is considered to have large debts and high credit risk (Asyah, 2021).
Thus, this is a situation where management has enormous pressure from third parties to be
able to answer the trust that has been given. In addition, the company must save itself from
such conditions to be considered capable of repaying the loan.
This is supported by the opinion of Skousen et al. (2009) that one of the pressures often
experienced by company management is the need to obtain additional debt or external
financing sources to remain competitive, including research financing and development or
capital expenditures. Each company manager has their respective financial targets which
are proxied by net income for the period by total assets owned.
This financial target triggers the management to continue to perform at their best in any
situation and condition to attract principals to continue to invest their shares in the
company. However, internal and external conditions and situations drive banking financial
performance to be unpredictable because of the intense level of business competition in each
company, making it possible for management not to make a profit or suffer losses in a
particular period (Hangarista, 2021).

2.2 Ineffective monitoring affects financial statement fraud

Ineffective monitoring is a situation that describes the weakness or ineffectiveness of
company supervision in monitoring company performance. SAS No. 99 states that
managers have the opportunity to commit financial statement fraud if there is no effective
monitoring within the company (Aprilia, 2017). A lack of effective monitoring in supervising
company performance can be used by fraud perpetrators to commit fraud. The independent
board of commissioners is believed to be able to increase the effectiveness of monitoring
because it does not have a direct relationship or attachment to the company.
The spread of accounting scandals and fraudulent practices is one of the effects of weak
monitoring by the company which has provided an opportunity for an individual to act in
accordance with their interests (Listyaningrum et al., 2017). Companies that commit fraud
have fewer members outside the board of directors (BOD) when compared to companies that
do not commit fraud (Sari, 2014).

2.3 External auditor quality affects financial statement fraud

Audit quality is a systematic process for objectively evaluating evidence relating to the
assessment of economic activities and events to communicate the results to interested users.
Measuring audit quality is carried out by classifying audit services from big four public
accounting firms with non-big four public accounting firms (Widodo 2016). An examination
has value because of the ability to provide assurance independently of the credibility of
accounting information, which improves the allocation of resources and increases efficiency
(Zhang and Zheng, 2009). To obtain adequate assurance of the fairness of the financial
statements, an examination of the internal control system and compliance with the
provisions of laws and regulations is carried out (Hidayat and Khotimah, 2022).
Audit quality can be realized if it meets generally accepted auditing standards. Users of
financial statements state that audit quality occurs if the auditor can provide assurance that
there is no error or fraud in preparing financial statements (Lascarya, 2022). Thus, the
higher the audit quality and the larger the size of the public accounting firms, the better
the integrity of the financial statements will be. The larger the public accounting firm size,
the better the integrity of the financial statements produced. This is because large public Determinants
accounting firms have more incentives to avoid things that can damage their reputation. of financial
statement
2.4 Change in auditor affects financial statement fraud
The auditor is in charge of examining and supervising the financial statements prepared by
fraud
management in the company. Information about companies indicated by fraud is usually
also known by the auditor. Companies that commit fraud more often change the auditor
because company management tends to try to reduce the possibility of detection by the old
auditor related to fraud in financial reporting (Septriani and Handayani, 2018). The change
in auditor is used by the company as a form of eliminating the fraud trail found by the
previous auditor. This tendency encourages companies to replace independent auditors to
cover up fraud committed in the company’s financial reporting.
The change in auditor carried out by public companies is not because they want to erase
the traces of fraud found by the previous auditor, but because the company complies with
Government Regulation Number 20 of 2015 concerning Public Accountant Practices Article
11 paragraph 1. Sabatian and Hutabarat (2020) argued that the change in auditor did not
have a significant relationship with financial statement fraud. This argument is not
supported by SAS No. 99 or Albrecht and Albrecht (2002), which suggested that the change
in auditor is associated with financial statement fraud. Auditor turnover can be a proxy for
rationalization.

2.5 Frequent number of CEO’s pictures affects financial statement fraud

What is meant by the frequent number of CEO’s pictures is the number of CEO’s pictures
displayed in the company’s annual report. The number of CEO’s pictures displayed in a
company’s annual report can represent the level of arrogance or superiority that the CEO
has (Yesiariani and Rahayu, 2017). The CEO’s picture is a picture of the CEO displayed in
the company’s annual report. The CEO’s picture displayed in the company’s annual report
can represent the level of arrogance or superiority that the CEO has.
According to Daud and Yuniasih (2020), a CEO tends to have a desire to show their
status and position to anyone in the company because they do not want to lose that status or
position (or feel unappreciated). A high level of arrogance can lead to fraud due to the
arrogance and superiority of a CEO, making the CEO feel that any internal control will not
apply to him because of their status and position. According to Crowe (2011), the possibility
that a CEO might carry out various ways to maintain their status and position by displaying
pictures is not proven in this study.

2.6 External pressure affects the firm size

External pressure is excessive pressure for management to meet third-party expectations.
Companies can obtain sources of funds from investors and creditors. In this case, the
creditor is the third party who is expected to provide loan funds, so they have certain
standards to avoid risks that cannot be overcome. The condition of a company that does not
meet these standards is very unlikely to be given a loan (Nasirudin and Nugroho, 2021).
This external pressure comes from the external side of the organization, such as
regulations issued by the government. The existence of these regulations is shown to
regulate existing practices for the better (Suryani et al., 2022). However, in practice, these
regional regulations are still difficult to apply by local governments, especially at SKPD as
the implementing level (Noprizal, 2017). External pressure is always related to every aspect
connected with the environment around the organization. External pressure makes
all members of the organization carry out the process of operational activities properly.
JIABR The process is even carried out more openly, such as using independent external auditors.
When the process is successfully implemented, the transparency process of financial
reporting will increase (Saputra and Kesumaningrum, 2017). The external pressure affects the
firm size because external pressures formed from outside, such as government regulations,
public pressure or encouragement from certain parties facilitate the transparency process to
be carried out in the form of good company total assets.

2.7 Ineffective monitoring affects the firm size

Ineffective monitoring is a condition where the internal control system is not running
effectively. According to SAS No. 99, this happens because there is an individual or a small
group that dominates the management in the company without a compensation supervisor,
the ineffective supervision of the board of commissioners, directors and audit committees
over the financial reporting process, resulting in the opening of opportunities for fraudulent
actions that affect the firm size (Septriani and Handayani, 2018). With the lack of control
from the company’s internal parties, it is an opportunity for several parties to manipulate
the data in the financial statements. This condition can be caused by the formation of the
board of commissioners which is only intended to fulfill the regulations, not to create good
corporate governance.
Firm size can be affected by ineffective monitoring because the duties of the board of
commissioners are to ensure the implementation of the company’s strategy, oversee
management and require accountability. If the board of commissioners can carry out
supervision properly/effectively, it can prevent fraudulent financial reporting, thus the firm
size can be affected by ineffective monitoring (Sulastri, 2019).

2.8 External auditor quality affects the firm size

Juliardi (2013) suggested that audit quality is a measure that indicates the level of
competence and independence of the public accounting firm in auditing the financial
statements it examines so that it can provide a guarantee for the reliability and quality of the
accounting figures in the financial statements. External auditing is an objective examination
of the financial statements of a company or other organization to determine whether the
financial statements fairly present the financial condition and results of operations of the
company or organization. The agency theory assumes that humans always have self-
interest, so the presence of an independent third party as a mediator in the relationship
between the principal and the agent, in this case, an independent auditor, is indispensable.
Investors will be more inclined to accounting data resulting from high audit quality (Kassem
and Turksen, 2021).

2.9 Change in auditor affects the firm size

The change of auditor who performs an audit of a company is called auditor switching.
There are two types of auditor switching, including mandatory auditor switching and
voluntary auditor switching. Auditor switching caused/mandated by regulations is called
mandatory auditor switching. Meanwhile, voluntary auditor switching is the transfer of a
public accounting firm by a client company that is carried out voluntarily or a request for a
change in auditor in the same public accounting firm by a client company and not due to
obligations or conflict of regulations. According to Mardiyah (2002), two factors that
influence companies to change public accounting firms are client-related factors; including
financial difficulties, failed management, changes in ownership, initial public offering and
auditor-related factors; audit fees and audit quality.
 Besides having very different capabilities and resources, the reasons for termination of Determinants
engagement between auditors and companies may differ when companies change the of financial
auditors. This causes the firm size to be affected by the change in auditor. Firm size is a statement
measure to determine the size of the client company with the company’s finances. In this
regard, large companies are believed to be able to solve the financial difficulties they face
fraud
than small companies do. Therefore, the change in auditor in this study was tested whether
it could affect the firm size (Aprianti and Hartaty, 2016).

2.10 Frequent number of CEO’s picture affects the firm size

The frequent number of CEO’s pictures is the number of depictions of a CEO in a company
by displaying a display picture or profile, achievements, photos or other information
regarding the CEO’s track of record which is described repeatedly in the company’s annual
report (Crowe, 2011 in Yusuf et al., 2015). A CEO tends to be more willing to show the public
the power and career they have in the company. This is carried out because they do not want
to lose their status or position in the management of the company (or feel that they are not
considered). The frequent number of CEO’s pictures means that the level of arrogance
is certainly seen in the attitude of a CEO because the CEO is the top management in
the company. Thus, if the frequent number of CEO’s pictures affects the firm size, the firm
size can be considered to be large and trustworthy because of the attitude and performance
of the CEO as seen from the frequent number of CEO’s pictures.

2.11 Firm size on financial statement fraud

Large companies are more likely to have a wider number of transactions and information,
while small companies are more likely to have narrower transactions and information. This
means large-size companies can increase the information asymmetry that occurs compared
to small-size companies. Large companies tend to disclose more details of their financial
statements because they have more information that can be disclosed than small companies
do (Handoko and Natasya, 2019). This means that large and small companies both have the
opportunity to commit fraud in financial statements fraud of the company.

2.12 External pressure affects financial statement fraud with firm size as the mediating
variable
One of the external pressures is the company’s ability to pay debts or meet debt
requirements. Moreover, managers may also have pressure to obtain additional debt or
capital (Skousen et al., 2009). The company’s management will be pressured by the
increasing debt because the credit risk will also be high, thus allowing fraud to occur.
Financial statement fraud is intentional or negligence in the financial statements presented
that are not in accordance with generally accepted accounting principles. This negligence or
intentional fraud is material in nature so it can affect the decisions that will be taken by
interested parties (Annisya et al., 2016). Firm size can be seen from the size of the value of
equity, the value of sales or the value of assets. The size of the assets is used to measure the
firm size. The size of the assets is measured as the logarithm of the total assets. Firm size in
this study is used as a mediating variable because it is used to explain why the independent
variables affect the dependent variable. Riyanto (2011, p. 299) argued that large companies
with a large distribution of company shares will also have a small impact on the loss of
control from the dominant party over the company, so they tend to be more daring to issue
new shares to meet company needs than small companies do.
JIABR 2.13 Ineffective monitoring affects financial statement fraud with firm size as the mediating
variable
Management’s behavior and reasons/motives to commit fraud in financial statements are
widely explained in fraud theory. One way to minimize fraud is by maintaining good
monitoring of the company. Ineffective monitoring is a condition where the internal control
system is not running effectively. According to SAS No. 99, this happens because there is an
individual or a small group that dominates the management in the company without a
compensation supervisor. The ineffective monitoring of the board of commissioners,
directors and audit committees over the financial reporting process gives opportunities for
fraudulent actions to occur (Septriani and Handayani, 2018). In addition, firm size is also
used in this study as a mediating variable where the firm size can show the activities of the
company performed by the company. The larger the firm size means the higher the assets
that can be used as collateral to obtain debt so that it will increase. A large company will be
able to maintain its existence well because it has easy access to the capital market when
compared to a small company (Purnama and Mayliza, 2019).

2.14 External auditor quality affects financial statement fraud with firm size as the
mediating variable
Audit quality is a joint probability where an auditor will find and report fraud that exists in
their client’s accounting system. The probability that the auditor will find misstatements
depends on their technical ability, while the act of reporting misstatements depends on their
independence. This audit quality is essential because high audit quality will produce reliable
financial reports as a basis for decision-making (Kusharianti, 2003).
Firm size is a size of a company that can be seen by the number of assets owned by the
company (Wimelda and Marlinah, 2013). Large companies tend to be diversified and more
resilient to the risk of bankruptcy and have a lower probability of experiencing financial
difficulties. Firm size can be considered to mediate the external auditor quality. If the firm
size gets bigger, it will strengthen a positive signal for potential investors so that the stock
market price will increase (Mudjijah et al., 2019).

2.15 Change in auditor affects financial statement fraud with firm size as the mediating variable
An individual who commits fraud must have the capability or competence to deceive
internal controls, control the situation and develop strategies to disguise the fraud.
Companies that commit fraud more often change auditors because company management
tends to try to reduce the possibility of detection by old auditors related to fraud in financial
reporting (Septriani and Handayani, 2018). The change in auditor is used by the company as
a form of eliminating the fraud trail found by the previous auditor. This tendency
encourages companies to replace independent auditors to cover up fraud committed in the
company’s financial reporting. In this study, the firm size is used as a mediating variable
because the larger the firm size, the easier it is for the company to obtain sources of funds,
both internal and external. With the firm size as a mediating variable, may the firm size
affect the relationship between change in auditors with financial statement fraud into an
indirect relationship and cannot be observed and measured?

2.16 Frequent number of CEO’s picture affects financial statement fraud with firm size as
the mediating variable
A CEO usually has willing to show the public their status and position in a company
because they do not want to lose that status or position. According to Crowe (2011), the
possibility that the CEO will use various ways to maintain their status and position by Determinants
displaying pictures is not proven in this study due to a sense of superiority and arrogance of financial
with the position they have, worsen with greed, which makes the perpetrators believe that statement
internal control does not apply to them. Financial statement fraud that is not detected early
can develop into a major scandal that is more detrimental to many parties.
fraud
Firm size seen from total assets indicates that the larger the firm size, the greater the
assets that can be used as collateral to obtain debt so that the debt will increase. A large
company that can maintain its existence well will have easy access to the capital market.
Thus, large companies are usually able to pay higher dividend ratios than small companies
and increase the value of the company so that many investors are interested in investing. In
this study, firm size is used as a mediating variable. This is because, with firm size as a
mediating variable, it may prove that the frequent number of CEO’s pictures with financial
statement fraud can be mediated by firm size.

3. Method
This study is empirical research on Islamic banking companies listed on the IDX. The
banking industry is one of the industries that use the most knowledge-intensive industry.
The Islamic banking industry on the IDX was chosen as the research object because the data
required is easy to obtain, can be accessed at any time and its reliability is guaranteed. The
empirical study used secondary data obtained from www.idx.co.id, then processed and
analyzed thoroughly.

3.1 Model specification and variables definition

3.1.1 Independent variables
 External pressure. External pressure is the pressure that is excessive enough for
management to fulfill all the expectations and desires of third parties who submit
authorization rights for a business they own, including decision-making and so on
for the survival of a company (Pulukadang et al., 2014).
 Ineffective monitoring. Ineffective monitoring is a control that is quite weak to
finally provide an opportunity for people who want to take advantage of the
situation to commit fraud.
 External auditor quality. Lennox and Pittman (2010) in a study conducted by Siddiq
et al. (2017) stated that if a company entrusts services to a public accounting firm
that is included in the big four members, it is likely that the company will find it
easier to detect fraud in their financial statements because members belonging to
the big four have much better and professional human resources.
 Change in auditor. Change in auditor is an action taken by a company/entity to
replace the previous auditor. In SAS No. 99 (AICPA, 2002), the change of auditors in
a company can be an indication that the company has committed fraud. The
company will make changes to the auditor more often because the auditor who has
previously been given the duty to audit the company’s annual report will more
easily detect fraud by the management of the company (Tiffani and Marfuah., 2015).
 Frequent number of CEO’s picture. The CEO or often referred to as the president
director in a company is an individual who is considered capable/expert and is
trusted by the shareholders to lead and manage the directors in a company (Leela
and Devy, 2017). The more pictures displayed, the higher the level of arrogance or
JIABR superiority of the CEO so that an arrogant attitude arises for their position (Daud
and Yuniasih, 2020).

3.1.2 Dependent variable

3.1.2.1 Financial statement fraud. The dependent variable used in this study is financial
statement fraud. According to the American Institute of (AICPA, 2016), financial statement
fraud is an intentional misstatement that can result in losses for stakeholders. Fraud arises
because the management manipulates the reports that they make to fulfill their wishes and
the parties involved in it.
Fraud can be measured by using proxies in earnings management because earnings
management is an act that is carried out intentionally to change related information in the
financial statements of a company (Sabatian and Hutabarat, 2020). In this study, the
dependent variable (Y) was calculated using the Beneish M-score model which was adopted
in 1999. The following is the formula used in the calculation of the Beneish model:
Beneish M
score ¼
4:840 þ 0:920 DSRI þ 0:528 GMI þ 0:404 AQI þ 0:892 SGI
þ 0:11 DEPI – 0:172 SGAI þ 4:679 TATA – 0:327 LEVI

The details of each ratio are as follows:

 Days sales in receivable index (DSRI) is a ratio related to receivables. In this case,
the DSRI is used to measure the income of the company which is caused by being
overstated, as manipulation in the financial statements can be reflected in the high
DSRI results. The formula for calculating DSRI is as follows:
ð Account Receivables t = Sales tÞ
ð Account Receivables t
1 = Sales t
1Þ
 Gross margin index (GMI) is the ratio used to determine the results of the
comparison between the gross profit ratio of the previous year and the current
period’s profit (Mahama, 2015). If the results shown from the GMI calculation are
above 1.0, it indicates that the company’s gross profit is in a poor condition and the
company can manipulate profits. The formula for calculating GMI is as follows:
!
Sales t
1 – COGS t
1
Sales t
1 ðSales t – COGS tÞ = Sales t

 Asset quality index (AQI) is a ratio that reflects changes in asset realization by
comparing buildings, current assets, land and equipment with total assets
(Mahama, 2015). If the index value shown from the AQI calculation is higher than
1.0, it indicates the company is increasing deferred costs for intangible assets and
this can indicate that the company is manipulating earnings (Warshavsky, 2012).
The formula for calculating AQI is as follows:
  
1
ðCurrent Asset t þ PPE tÞ = Total Asset t
  
1
ðCurrent Asset t
1 þ PPE t
1Þ = Total Asset t
1

 The sales growth index (SGI) is a ratio used to determine the results of the
comparison of revenue growth that occurred in the previous year compared to the
 current period (Mahama, 2015). If the results shown from the SGI calculation are Determinants
above 1.0, it can be stated that there is positive revenue growth. However, this can of financial
indicate that a company has manipulated profits in its annual report. The formula
for calculating SGI is as follows: statement
fraud
Sales t
Sales t
1
 The depreciation index (DEPI) is a ratio used to determine depreciation costs and
the gross value of company assets compared to the previous period with the current
period (Mahama, 2015). If the results shown from the DEPI calculation are above
1.0, it indicates an upward adjustment of assets and this can indicate manipulation
of earnings in the current year period. The formula for calculating DEPI is as
follows:
 
Depreciation t
1 = ð Depreciation t
1 þ PPE t
1Þ
 
Depreciation t = ð Depreciation t þ PPE tÞ
 Sales general and administrative expense index (SGAI) is a ratio used to determine
the expenses from sales and administration compared to the previous period with
the current period (Mahama, 2015). If the results show an increase in sales that is not
fair compared to general and administrative expenses, there is likely a negative
indication of the company’s prospects in the future. The formula for calculating
SGAI is as follows:
ðSGA Expense t = Sales tÞ
ðSGA Expense t
1 = Sales t
1Þ
 Total accrual to total assets index (TATA) is the ratio used to determine the level of
cash sales in the company (Mahama, 2015). If the calculation results show that the
total accruals have a higher value than the company’s cash, the company is most
likely to manipulate its income (Beneish, 1999). The formula for calculating TATA
is as follows:

ðChange in Working Capital t – Change in Cash t – Change in Tax Payable t – Depr & Amor Exp tÞ
Total Assets t

 The leverage index (LEVI) is a ratio used to determine the long-term risk and financial
structure of the company (Mahama, 2015). If the results shown from the LEVI
calculation results are above 1.0, it indicates an increase in leverage in the company
and results in manipulation. The formula for calculating LEVI is as follows:

 
ð LTD t þ Current Liabilities tÞ = Total Assets t
 
ð LTD t
1 þ Current Liabilities t
1Þ = Total Assets t
1

3.1.3 Moderating variable

 Firm size. Firm size can be used to describe the state of a company. Firm size can be
seen from total assets, market share value, etc. (Daud and Yuniasih, 2020). Small
JIABR companies tend to be more easily affected by pressure from outside the company,
while larger companies allow them to be stronger in dealing with pressures from
outside the company to prevent fraud in the financial statements.

3.2 Data analysis with of structural equation modeling partial least square
Empirical testing of hypotheses that have been developed used data analysis techniques of
structural equation modeling (SEM)-PLS. The methods applied were first-order construct
and second-order construct. The first-order construct is a defined construct that can be
measured directly by its indicators. At the same time, the second-order construct is a
construct that is not measured directly by the indicators but through the dimensions or
components of each construct for which the dimensions are measured by the indicators
(Ghozali, 2018).

3.3 Data analysis with structural equation modeling partial least square
3.3.1 Evaluating the measurement model (outer model). The evaluation stage of the
measurement model (outer model) is evaluating the validity and reliability of each construct
or latent variable (model). This validity test can be seen from the loading factor value for
each construct. The required loading factor value must be higher than 0.7, and the average
variance extracted (AVE) value must be higher than 0.5. Discriminant validity relates to the
principle that different constructs’ quantifiers (manifest variables) should not be highly
correlated. Testing this validity is done by looking at the cross-loading value for each
variable which must be higher than 0.70 and comparing the square root of the AVE for each
construct is done with the correlation value between constructs in the model (Ghozali, 2018).
3.3.2 Evaluating the structural model (inner model). Evaluation of the structural model
was conducted by looking at the R-squares value for each endogenous latent variable as
predictive power and the structural model. This value is also the goodness of the fit model
test. Changes in the R-square value are used to explain the effect of certain exogenous latent
variables on endogenous latent variables, and whether they have a substantive effect. The
R-square value of 0.67 for endogenous latent variables in the structural model indicates a
robust model, 0.33 indicates a moderate model and 0.19 indicates a weak model (Ghozali,
2013). This evaluation can also be done with Q2 predictive relevance provided that the
values: 0.02 indicates a weak model, 0.15 indicates a moderate model and 0.35 indicates a
strong model.
The next stage evaluates the structural model by looking at the significant value to
determine the effect of inter-variables through the bootstrapping procedure. This procedure
uses the entire original sample for resampling. The significance value used (two-tailed) t-
values were 1.65 (significant level 10%), 1.96 (significant level 5%) and 2.58 (significant level
1%).

3.4 Hypothesis test

Hypothesis testing is used to confirm the logically estimated relationship between the
independent and dependent variables. Hypothesis testing is seen from the probability
value by comparing the p-value obtained with a predetermined significant level of 0.05. If
the p-value < 0.05, the independent variable can significantly affect the dependent
variable (accepted hypothesis). On the other hand, if the p-values > 0.05, the hypothesis is
rejected.
4. Results and analysis Determinants
4.1 Data analysis of financial
4.1.1 Outer model or measurement model.
statement
 Convergent validity. Table 1 above shows that all outer loading values are above 0.7, fraud
which means that the indicators used in this study have relatively good convergent
validity.

Figure 1 shows that all indicators have the required loading factor values.
 Discriminant validity. Table 2 shows that several loading factor values for each
indicator of each latent variable still have the highest loading factor value compared
to the loading factor associated with other latent variables. This means that each
latent variable does not yet have good discriminant validity, which means that some
latent variables still have high correlation measurements with other constructs.
 Composite reliability. Based on Table 3, it can be concluded that all constructs meet
the reliable criteria. The composite reliability value indicates that it is above 0.70
and the AVE is above 0.50. Referring to the composite reliability value, all
constructs meet the high-reliability criteria.

4.1.2 Assessing inner model (structural model). The results of data processing using
SmartPLS are shown in Table 5. The R-square value for financial statement fraud (Y) is 0.528,
meaning that the effect of the independent variables on financial statement fraud (Y) is 52.8%.
A percentage of 52.8% of the independent variables can explain the dependent variable; the
remaining 47.2% is explained by other variables not included in the research model.
The results of data processing using SmartPLS can be seen in Table 4. The R-square
value for firm size (Z) is 0.605, meaning that the effect of the independent variables on firm
size (Z) is 60.5%. A percentage of 60.5% of the independent variables can explain the
dependent variable; the remaining 39.5% is explained by other variables not included in the
research model.
4.1.3 Inner model path coefficient analysis results. External pressure on financial
statement fraud has a coefficient with a positive direction. The results of the analysis show
that the path coefficient value is 0.312. The coefficient has a positive value, which means a
unidirectional relationship between external pressure and financial statement fraud.
External pressure on firm size has a coefficient with a positive direction. The results of the
analysis show that the path coefficient value is 0.268. The positive coefficient means a
unidirectional relationship between external pressure and firm size.

Change Frequent no. Ineffective Financial External External Firm

in auditor of CEO’s picture monitoring statement fraud auditor quality pressure size

X1 0.987
X2 0.789
X3 0.976
X4 0.987
X5 0.876
Y 0.899
Z 0.808 Table 1.
Outer loadings
Source: Biduri and Tjahjadi (2024) (measurement model)
JIABR

Figure 1.
Loading factor model

Change Frequent no. of Ineffective Financial External External Firm

in Auditor CEO’s Picture monitoring statement fraud auditor quality pressure size

X1 0.017 0.458
0.081 0.257 0.347 1.000
0.134

X2
0.094
0.195 1.000
0.060
0.143
0.081
0.016
X3
0.218 0.410
0.143
0.196 1.000 0.347 0.042
X4 1.000
0.224
0.094 0.391
0.218 0.017
0.154
X5
0.224 1.000
0.195
0.092 0.410 0.458 0.191
Y 0.391
0.092
0.060 1.000
0.196 0.257
0.348
Z
0.154 0.191
0.016
0.348 0.042
0.134 1.000
Table 2.
Cross loading value Source: Biduri and Tjahjadi (2024)

Ineffective monitoring of financial statement fraud has a coefficient with a positive

direction. The results of the analysis show that the path coefficient value is 0.052. The positive
coefficient means a unidirectional relationship between external pressure and financial
statement fraud. Ineffective monitoring of firm size has a coefficient with a positive direction.
The results of the analysis show that the path coefficient value is 0.012. The positive coefficient Determinants
means a unidirectional relationship between external pressure and firm size. of financial
External auditor quality on financial statement fraud has a coefficient with a positive
direction. The results of the analysis show that the path coefficient value is 0.222. The
statement
positive coefficient means a unidirectional relationship between external auditor quality and fraud
financial statement fraud. External auditor quality on firm size has a coefficient with a
positive direction. The results of the analysis show that the path coefficient value is 0.004.
The positive coefficient means a unidirectional relationship between external auditor quality
and firm size.
Change in auditor on financial statement fraud has a coefficient with a positive direction.
The results of the analysis show that the path coefficient value is 0.284. The positive

Cronbach’s Composite Average extracted

alpha rho_A reliability variance (AVE)

Change in auditor 1.000 1.000 1.000 1.000

Frequent number of CEO’s picture 1.000 1.000 1.000 1.000
Ineffective monitoring 1.000 1.000 1.000 1.000
Financial statement fraud 1.000 1.000 1.000 1.000
External auditor quality 1.000 1.000 1.000 1.000
External pressure 1.000 1.000 1.000 1.000
Table 3.
Firm size 1.000 1.000 1.000 1.000 Composite reliability
and average variance
Source: Biduri and Tjahjadi (2024) extracted

R-square Adjusted R-square

Financial statement fraud 0.528 0.234

Firm size 0.605 0.604
Table 4.
Source: Biduri and Tjahjadi (2024) R-square value

No. Variable relation Path coefficient

1 Change in auditor (X4) Financial statement fraud (Y) 0.284

2 Change in auditor (X4) Firm size (Z) 0.082
3 Frequent number of CEO’s picture (X5) Financial statement fraud (Y) 0.044
4 Frequent number of CEO’s picture (X5) Firm size (Z) 0.299
5 Ineffective monitoring (X2) Financial statement fraud (Y) 0.052
6 Ineffective monitoring (X2) Firm size (Z) 0.012
7 External auditor quality (X3) Financial statement fraud (Y) 0.222
8 External auditor quality (X3) Firm size (Z) 0,0.004
9 External pressure (X1) Financial statement fraud (Y) 0.312
10 External pressure (X1) Firm size (Z) 0.268
Table 5.
11 Firm size (Z) Financial statement fraud (Y) 0.245 Inner model path
coefficient analysis
Source: SmartPLS output results
JIABR coefficient means a unidirectional relationship between change in auditor and financial
statement fraud. Change in auditor on firm size has a coefficient with a positive direction.
The results of the analysis show that the path coefficient value is 0.082. The positive
coefficient means a unidirectional relationship between change in auditor and firm size.
Frequent number of CEO’s picture on financial statement fraud has a coefficient with a
positive direction. The results of the analysis show that the path coefficient value is 0.044.
The positive coefficient means that there is a unidirectional relationship between the
frequent number of CEO’s picture and financial statement fraud. Frequent number of CEO’s
picture has a coefficient with a positive direction to firm size. The results of the analysis
show that the path coefficient value is 0.299. The positive coefficient means a unidirectional
relationship between the frequent number of CEO’s picture and firm size.
Firm size has a coefficient with a positive direction on financial statement fraud. The
results of the analysis show that the path coefficient value is 0.245. The positive coefficient
means a unidirectional relationship between firm size and financial statement fraud.

5. Hypothesis test
5.1 Intervariable direct effect
The test results can be interpreted based on the direct effect between variables as follows:
5.1.1 External pressure affects financial statement fraud. Table 6 shows that the
relationship between variables of external pressure and financial statement fraud shows a
path coefficient value of 0.312 with a t-values of 2.500; this value is higher than t-table (1.960)
with a p-value of 0.000, which is lower than a ¼ 10%. This result means that external
pressure affects financial statement fraud.
5.1.2 Ineffective monitoring affects financial statement fraud. Table 6 show shows that
the relationship between variables of Ineffective Monitoring and Financial report fraud
shows a path coefficient value of 0.052 with a t-values of 3.951; this value is higher than the
t-table (1.960) with a p-value of 0.006, which is lower than a ¼ 10%. This result means that
ineffective monitoring affects financial statement fraud.
5.1.3 External auditor quality affects financial statement fraud. Table 6 shows that the
relationship between variables of external auditor quality and financial statement fraud

Original Sample SD T statistics

Description sample (O) mean (M) (STDEV) (jO/STDEVj) p-values

Change in auditor ! Financial statement fraud 0.284 0.287 0.142 2.009 0.050
Change in auditor ! Firm size 0.082 0.877 0.133 2.621 0.008
Frequent number of CEO’s picture ! Financial
statement fraud 0.044 0.623 0.101 2.435 0.005
Frequent number of CEO’s picture ! Firm size 0.299 0.309 0.110 2.714 0.009
Ineffective monitoring ! Financial statement
fraud 0.052 0.897 0.055 3.951 0.006
Ineffective monitoring ! Firm size 0.012 0.122 0.073 2.163 0.001
External auditor quality ! Financial statement
fraud 0.222 0.220 0.095 2.342 0.023
External auditor quality ! Firm size 0.004 0.415 0.195 2.021 0.004
External pressure ! Financial statement fraud 0.312 0.308 0.208 2.500 0.000
Table 6. External pressure ! Firm size 0.268 0.967 0.285 2.938 0.003
External pressure ! Financial statement fraud 0.245 0.229 0.182 3.351 0.003
Results for inner
weight Source: Biduri and Tjahjadi (2024)
shows a path coefficient value of 0.22 with a t-values of 2.342; this value is higher than t- Determinants
table (1.960) with a p-value of 0.023, which is a lower than a ¼ 10%. This result means that of financial
the quality of the external auditor quality affects financial statement fraud.
5.1.4 Change in auditor affects financial statement fraud. Table 6 shows that the
statement
relationship between variables of change in auditor and financial statement fraud shows a fraud
path coefficient value of 0.284 with a t-value of 2.009; this value is higher than t-table (1.960)
with a p-value of 0.050, which is lower than a ¼ 10%. This result means that change in
auditor affects financial statement fraud.
5.1.5 Frequent number of CEO’s pictures affects financial statement fraud. Table 6
shows that the relationship between variables of frequent number of CEO’s picture and
financial statement fraud shows a path coefficient value of 0.044 with a t-values of 2.435; this
value is higher than t-table (1.960) with a p-value of 0.005, which is lower than a ¼ 10%.
This result means that the frequent number of CEO’s pictures affects financial statement
fraud.
5.1.6 External pressure affects firm size. Table 6 shows that the relationship between
variables of External Pressure and Financial Statement Fraud shows a path coefficient
value of 0.268 with a t-values of 2.938; this value is higher than the t-table (1.960) with a p-
value of 0.003 which is a lower than a ¼ 10%. This result means that external pressure
affects financial statement fraud.
5.1.7 Ineffective monitoring affects firm size. Table 6 shows that the relationship between
variables of ineffective monitoring and firm size shows a path coefficient value of 0.012 with a
t-values of 2.163; the value is higher than the t-table (1.960) with a p-value of 0.001 which is
lower than a ¼ 10%. This result means that ineffective monitoring affects firm size.
5.1.8 External auditor quality affects firm size. Table 6 shows that the relationship
between variables of external auditor quality and firm size shows a path coefficient value of
0.004 with a t-values of 2.021; this value is higher than the t-table (1.960) with a p-value of
0.004, which is lower than a ¼ 10%. This result means that the external auditor quality
affects firm size.
5.1.9 Change in auditor affects firm size. Table 6 shows that the relationship between
variables of change in auditor and firm size shows a path coefficient value of 0.082 with a t-
values of 2.621; the value is higher than the t-table (1.960) with a p-value of 0.008, which is
lower than a ¼ 10%. This result means that change in auditor affects firm size.
5.1.10 Frequent number of CEO’s picture affects firm size. Table 6 shows that the
relationship between variables of frequent number of CEO’s picture and firm size shows a
path coefficient value of 0.299 with a t-values of 2.714; this value is higher than t-table (1.960)
with a p-value of 0.009, which is lower than a ¼ 10%. This result means that the frequent
number of CEO’s picture affects firm size.
5.1.11 Firm size affects financial statement fraud. Table 6 shows that the relationship
between variables of firm size and financial statement fraud shows a path coefficient value
of 0.245 with a t-values of 3.351; this value is higher than the t-table (1.960) with a p-value of
0.003 which is lower than a ¼ 10%. This result means that firm size affects financial
statement fraud.

6. Intervariable indirect effect

6.1 Firm size mediates the relationship between external pressure and financial statement fraud
Table 7 shows that firm size can mediate the effect of external pressure on financial statement
fraud with a t-values of 3.643 and a p-value of 0.003, which is higher than a ¼ 5%. Thus, firm
size mediates the relationship between external pressure and financial statement fraud.
JIABR Original Sample T statistics
sample (O) mean (M) SD(STDEV) (j O/STDEV j) p-values

Change in auditor ! Firm size !

Financial statement fraud 0.202 0.240 0.035 2.583 0.002
Frequent number of CEO’s picture !
Firm size ! Financial statement fraud 0.073 0.708 0.054 3.366 0.001
Ineffective monitoring ! Firm size !
Financial statement fraud 0.003 0.741 0.025 3.117 0.000
External auditor quality ! Firm size !
Financial statement fraud 0.001 0.122 0.056 2.018 0.006
Table 7. External pressure ! Firm size !
Financial statement fraud 0.066 0.776 0.102 3.643 0.003
Results for indirect
effect Source: Biduri and Tjahjadi (2024)

6.2 Firm size mediates the relationship between ineffective monitoring and financial
statement fraud
Table 7 shows that the firm can mediate the effect of ineffective monitoring on financial
statement fraud with a t-values of 3.117 and a p-value of 0.000, which is higher than a ¼ 5%.
Thus, Firm Size mediates the relationship between ineffective monitoring and financial
statement fraud.

6.3 Firm size mediates the relationship between external auditor quality and financial
statement fraud
Table 7 shows that firm size can mediate the effect of external auditor quality on financial
statement fraud with a t-values of 2.018 and a p-value of 0.006, which is higher than a ¼ 5%.
Thus, Firm Size mediates the relationship between external auditor quality and financial
statement fraud.

6.4 Firm size mediates the relationship between change in auditor and financial statement fraud
Table 7 shows that firm size can mediate the effect of change in auditor on financial statement
fraud with a t-values of 2.583 and a p-value of 0.006, which is higher than a ¼ 5%. Thus, firm
size mediates the relationship between change in auditor and financial statement fraud.

6.5 Firm size mediates the relationship between frequent number of CEO’s picture and
financial statement fraud
Table 7 shows that firm size can mediate the effect of the frequent number of CEO’s picture
on financial statement fraud with a t-values of 3.366 and a p-value of 0.001, which is higher
than a ¼ 5%. Thus, firm size mediates the relationship between the frequent number of
CEO’s picture and financial statement fraud.

7. Discussion
7.1 External pressure affects financial statement fraud
External pressure is excessive pressure for management to meet the requirements or
expectations of third parties. Referring to SAS No. 99, when extreme pressure from external
parties occurs, there is a risk of fraud on the financial statements. This is supported by the
opinion of Skousen et al. (2009) who stated that one of the pressures often experienced by
company management is the need to obtain additional debt or external financing sources to Determinants
remain competitive, including research financing and development or capital expenditures. of financial
Person (1999) suggested that greater leverage (LEV) can be associated with a greater
likelihood of breaching credit covenants and a lower ability to raise additional capital
statement
through borrowing. This statement is also strengthened by Lou and Wang (2009) who fraud
stated that when a company experiences external pressure, a greater risk of material
misstatement due to fraud can be identified.
A study conducted by Tiffani and Marfuah (2015) shows that the percentage of total debt
to total assets positively affects financial statement fraud.

7.2 Ineffective monitoring affects financial statement fraud

Ineffective monitoring is a situation where the company does not have a supervisory unit
that effectively monitors its performance. Ineffective monitoring can occur because of the
dominance of management by an individual or small group, weak supervision of the BOD
and audit committee over the financial reporting process, internal control, etc. (SAS No. 99).
To control the company’s performance effectively, an independent commissioner is required.
With the presence of an independent commissioner, the supervisory activities will be more
independent.
An independent commissioner is a member of the board of commissioners who is from
outside the issuer or public company that does not own shares directly or indirectly in the
issuer or public company. He/she has no affiliation with the issuer or public company,
commissioners, directors or major shareholders of the issuer or public company. He/she has
no business relationship either directly or indirectly related to the business activities of the
issuer or public company.
Gunarsih and Hartadi (2002) concluded that the board of commissioners could be widely
trusted to play an important role, especially in monitoring top management. Based on the
theory and from the results of previous research, the ineffective monitoring carried out by
the board of commissioners in monitoring the company’s operations by management is one
of the factors that can be used to detect financial statement fraud.

7.3 External auditor quality affects financial statement fraud

The cause of a significant internal control deficiency (material weakness) is the failure of
management not to take corrective action appropriately (IAPI, 2011, p. SA265.7–8). Aikins
(2012, pp. 198–217) determined that careless document maintenance on the issue of control
weaknesses does not strengthen the accountability of public entities. (Kassem and Turksen,
2021) found that investors’ perceptions increased after improving internal control. Doyle
et al. (2007, p. 1141) proved that weak internal control is related to the quality of financial
reports. IAASB (2011) stated that the weakness aspect of internal control can affect audit
quality. Internal control prevents, detects and corrects errors (Garrett et al., 2012, p. 17) and
fraudulent financial reporting (Amernic and Craig, 2010) so that financial statements are
presented fairly (Ratcliffe et al., 2009). Hollis Ashbaugh-Skaife et al. (2007) found a
significant and positive relationship between the improvement of weak internal control and
the quality of financial reports (Hunton and Rose, 2011). Based on various definitions and
the results of previous studies, it can be considered that the follow-up to the findings
regarding the weakness of internal control will affect the quality of financial reports. This is
related to non-compliance with laws and regulations, such as management’s noncompliance
with laws and regulations due to management’s inability to supervise the process of
preparing financial reports (IAPI, 2011, p. SA265.12).
JIABR In general, fraudulent financial reporting is caused by management overriding the
internal control system (IAPI, 2011, p. SA550.19–20; Hermanson et al. (2000); COSO, 2017, p.
14; (Arens et al., 2015). The results of previous research by Zhang and Zheng (2009) found
that companies that do not obey the law result in greater financial reporting problems.
Carcello and Nagy (2004) found a negative relationship between compliance with financial
statement misstatements. Naimat (2022) found that companies with a non-compliant culture
misrepresent financial statements. Based on several definitions and descriptions that have
been stated, it can be considered that the follow-up for improvement of noncompliance with
regulations and legislation is an indicator of audit quality (e.g. Ince, 2016, p. 120; IFAC, 2013,
p. 62), which in the end has a positive impact on the quality of financial reports (Zhang and
Zheng, 2009).

7.4 Change in auditor affects financial statement fraud

Rationalization is an attitude of self-justification for wrong behavior or the perception that
what is done is normal. The change in auditors does proxy for rationalization. The change in
the external auditor in the company means a change in auditors. Management has the task
of preparing financial reports that the auditors will examine and supervise. The auditor
usually knows information related to the client so a change of auditor is carried out.
The auditing process can determine whether the company is indicated to be fraudulent or
not. The detection of fraud committed by the company that is carried out by the auditor is
most likely if the company does not change the previous auditor. Most companies often
change auditors to reduce fraud detection to hide this problem. This incident requires the
company to change the external auditor to hide the manipulation of the financial statements
(Septriani and Handayani, 2018).

7.5 Frequent number of CEO’s picture affects financial statement fraud

Aprilia (2017) researched that a measure of arrogance can be seen from the frequency of the
number of CEO’s pictures in the company’s annual report. The more pictures of the CEO
displayed, the greater the desire to be known by the wider community. This is considered a
trait of the arrogance of the CEO. Traits are one of the elements contained in the fraud
pentagon. A high level of arrogance can lead to fraud because arrogance and superiority
make the CEO perceive that any internal control will not apply to them because of their
status and position. Related research conducted by Daud and Yuniasih (2020) and Siddiq
et al. (2017) stated that the frequent number of CEO’s picture affects fraudulent financial
reporting. The results of this study are different from the research conducted by Purwanti
et al. (2019) and Aprilia (2017), which stated that the frequent number of CEO’s pictures does
not affect fraudulent financial reporting.

7.6 External pressure affects firm size

External pressure is excessive pressure for management to meet the requirements or
expectations of third parties. According to Skousen et al. (2009), when there is excessive
pressure from external parties as a form of additional debt or external financing sources to
remain competitive, there is a risk of financial statement fraud. Small firm sizes can be
affected by pressure from outside the company. In contrast, companies with larger sizes are
expected to deal with external pressures in avoiding financial statement fraud.
7.7 Ineffective monitoring affects firm size Determinants
Ineffective monitoring is the condition of a company that does not have internal control, of financial
which can be seen from the ineffectiveness of supervision carried out by the BOD. As a
result, it provides an opportunity for managers to commit fraud. SAS No. 99 states that
statement
ineffective monitoring is one of the types of opportunities that can occur in financial fraud
statement fraud. Ineffective monitoring can be an opportunity for some parties to
manipulate data in financial statements. The firm size in question is the size of a company.
Based on SAS 99, no. 37, firm size also affects fraud risk. The company always wants to
show that the company is in good condition so that it is attractive to investors. There are
also various ways for managers to make good company conditions, one of which is by
manipulating financial statements.

7.8 External auditor quality affects firm size

The bigger a company, the better its audit quality (Gunarsih and Hartadi, 2002). Daud and
Yuniasih (2020) stated that firm size affects audit quality. This is because the bigger the
company, the more agency costs occur. Thus, large companies tend to choose the services of
large auditors who are professional, independent and have a good reputation to produce
better audit quality. Firm size greatly affects audit quality because large firms want better
audit quality; therefore, the company hires an independent and professional public
accountant office.

7.9 Change in auditor affects firm size

Change in director is the company’s efforts to improve the company’s performance in the
previous period by transferring authority from the old director to the new director.
According to Hermanson et al. (2000), a change in director may lead to a period of stress,
resulting in a greater opportunity for fraud to occur. The firm size in question is the size of a
company. According to SAS 99 no. 37, firm size also affects the risk of fraud. The company
always wants to show that it is in good condition so that it is attractive to investors. There
are also various ways for managers to make good company conditions, one of which is
manipulating financial statements.

7.10 Frequent number of CEO’s picture affects firm size

The frequent number of CEO’s pictures is the number of CEO’s pictures displayed in the
company’s annual report. A CEO tends to be more willing to show the public more about
their strengths and career. The CEO can show arrogance through the number of pictures in
the annual report. Arrogance can trigger fraud by taking advantage of their status and
position. Internal control cannot limit the actions they take. The firm size in question is the
size of a company. According to SAS 99 no. 37, firm size also affects the risk of fraud. The
company always wants to show that it is in good condition so that it is attractive to
investors. There are various ways managers can make good company conditions, one of
which is by manipulating financial statements.

7.11 Firm size affects financial statement fraud

Prasetyo (2015) stated that the larger the company indicated by the assets owned, the higher
the agency costs that the management must bear. The increasing agency costs indicate that
management must have a strict and good supervision and control system. The emergence of
a strict monitoring system is not desired by management because it will minimize the
movement to commit fraudulent actions against financial statements.
JIABR Prasetyo (2015) also added that the larger the company, the greater the opportunity for
the company to earn large profits. The high profit will trigger the high amount of tax that
the management must bear. This large tax regulation is not wanted by management, so it
will trigger financial statement fraud by the company. Prasetyo (2015) found that companies
that are classified as large as proxied by large assets tend to have a high level of fraud, but
this finding is not in line with research by Arimbi (2015), Mousavi et al. (2022) and Fuadin
(2017)

7.12 Firm size mediates the relationship of external pressure on financial statement fraud
Agency theory explains the position of shareholders as principals and management as
agents who are morally responsible for optimizing shareholder profits. They are also
responsible for making the company grow and progress. This pressure makes management
compelled to commit fraud which, in this case, is done so that they get appreciation from
shareholders. In the fraud triangle theory, one of the factors that cause financial report fraud
is the existence of excessive pressure for management to fulfill what is desired by
shareholders, particularly, the company can develop and progress. To overcome this
pressure, management requires funding from debt or other additional resources to remain
competitive with other companies. When a company has too much debt, the burden gets
higher and the company can even face bankruptcy. Therefore, the potential for fraud in
financial reporting arises because companies need to have high profits to convince creditors
that they can pay their debts. Company management will also feel pressured by high credit
risk along with the company’s high leverage ratio.

7.13 Firm size mediates the relationship between ineffective monitoring and financial
statement fraud
Priantara in Ulfah et al. (2017) stated that fraud perpetrators believe that their activities will
not be detected. According to the American Institute of AICPA (2016), ineffective monitoring
is a condition where the internal control system does not work effectively, giving rise to
opportunities to commit fraud. This happens because there is an individual or a small group
that dominates the management in the company due to the absence of compensation
oversight, and the ineffective supervision of the board of commissioners, directors and audit
committee over the financial reporting process, thus creating opportunities for fraudulent
actions. Regarding the size of the company, the supervision of a small group will be done as
in a large group in an effective control system.

7.14 Firm size mediates the relationship between external auditor quality and financial
statement fraud
External auditor quality is determined by the choice of audit service in a public accounting
firm appointed by the company, particularly an affiliated foreign public accounting firm.
That is because audit services are considered to have the ability to detect fraud and produce
better audit results than non-foreign affiliated audit services. In general, large companies will
use affiliated foreign public accounting firms because the audit services are considered
capable of detecting fraud and producing audit service reports compared to unaffiliated ones.

7.15 Firm size mediates the relationship of change in auditor to financial statement fraud
A change of director is the transfer of authority from the old director to the new director to
improve the performance of the previous management (Annisya et al., 2016). In addition,
Saputra and Kesumaningrum (2017) also showed research results that changes in directors
have an impact on fraudulent financial reporting. With a large firm size and a large Determinants
organizational structure, the director’s responsibility becomes greater to improve of financial
management performance so that the possibility of financial report fraud to achieve this
performance is also greater.
statement
fraud
7.16 Firm size mediates the relationship of frequent number of CEO’s picture and financial
statement fraud
Arrogance, which is proxied by the frequent number of CEO’s pictures, affects financial
statement fraud. This is because the increasing number of CEO’s pictures displayed in the
company’s annual report shows the level of arrogance and superiority that they have to
show the wider community about the status and position held in a company (Septriani and
Handayani, 2018). The status and position held in a large company will strengthen the
influence of the number of CEO’s pictures displayed in the company’s annual report on
financial statement fraud.

8. Conclusion and suggestion

8.1 Conclusion
The results of this research show that:
 External pressure affects financial statement fraud.
 Ineffective monitoring affects financial statement fraud.
 External auditor quality affects financial statement fraud.
 Change in auditor affects financial statement fraud.
 Frequent number of CEO’s picture affects financial statement fraud.
 External pressure affects firm size.
 Ineffective monitoring affects firm size.
 External auditor quality affects firm size.
 Change in auditor affects firm size.
 Frequent number of CEO’s picture affects firm size.
 Firm size affects financial statement fraud.
 Firm size mediates the relationship of external pressure on financial statement
fraud.
 Firm size mediates the relationship of ineffective monitoring of financial statement
fraud.
 Firm size mediates the relationship between external auditor quality and financial
statement fraud.
 Firm Size mediates the relationship between change in auditor and financial
statement fraud.
 Firm size mediates the relationship between frequent number of CEO’s picture and
financial statement fraud.

8.2 Suggestion
Based on the limitations of the research described above, the following are suggestions for
further study:
JIABR  Further research should expand the research object, for example, using all sectors
listed on the IDX.
 Further research should add other independent variables that have not been
included in this research, such as the Fintech variable.
 Different analytical tools should be used (other than PLS), for example, AMOS SEM.
 A Likert-scale measurement with a questionnaire could also be used.

9. Research limitation
The limitations of this research were discovered during the research process and used as
input for further research and related parties in the research process to obtain better
research results. The limitations of this research are as follows :
 This study only focuses on Islamic banking, so it cannot be generalized to other
sectors.
 This study only tested five independent variables, one dependent variable and one
mediating variable.
 The values of R-square are only 0.528 and 0.605. This means that the ability of the
independent variables in explaining the variables in the study are only 52.8% and
60.5%, respectively.

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Corresponding author
Bambang Tjahjadi can be contacted at: bambang.tjahjadi@feb.unair.ac.id

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