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Journal of Indonesian Economy and Business

Volume 31, Number 2, 2016, 208 219



Novita Puspasari
Faculty of Economics and Business, Universitas Jenderal Soedirman

Eko Suwardi
Faculty of Economics and Business, Universitas Gadjah Mada


This paper aims to examine the influence of individual morality and internal controls on
individuals propensity to commit accounting fraud at the local government level. This is a quasi-
experimental research paper. Individual morality and internal controls are hypothesized to be having
an interaction with each other in influencing the propensity to commit accounting fraud. Individuals
who have low levels of moral principles are hypothesized to have the tendency to commit accounting
fraud in the absence of any internal controls. To test this, a 2x2 factorial experiment was conducted
involving 57 students from the Masters in Economics Development programme at Gadjah Mada
University. The result shows that there is an interaction between individual morality and internal
controls. The absence of internal controls does not cause an individual with high moral principles to
commit accounting fraud. However, individuals with low morality levels tend to commit accounting
fraud when internal controls are absent.
Keywords: Accounting Fraud, Morality, Internal Controls, Local Government.

INTRODUCTION for it. One form of governments accountability

The financial system is no longer immune to its citizen is its financial statements.
since the reformation of our country. In the Sadly, the decentralization of financial
financial perspective, particularly in government management in Indonesia has allowed acts of
institutions, the reformation has created the legal corruption to now occur at the local level. A
basis for the construction of some regulations study by Indonesian Corruption Watch (ICW) in
regarding the autonomous regions and their 2014 found that 43 district heads in Indonesia
introduction of technologies that speed up the were sued for corruption. Based on PUKAT
process of organization, and the implementation UGMs report in 2013, corruption in Indonesia
of systems based on good governance. Good is dominated by government employees. Ano-
governance refers to the attitudes, ethics, ther research study from the Central Statistics
practices and values of society. One of the main Agency (BPS) in 2013 discovered that the anti-
pillars of good governance is its accountability corruption index declined, but at the same time,
system. Concerning the public sectors refor- the corruption index in Indonesia increased. In
mation in Indonesia, there is a strong demand for fact, Indonesia is a country with a high corrup-
accountability by public institutions, both tion rating on the world scale, ranked at number
national and local. Accountability can be defined 107 of 183 in the corruption index (Transparen-
as the responsibility for the success or failure to cy International, 2014). Research by Gaviria
implement the mission of the organization, (2001) showed that accounting fraud is influenc-
which is to achieve the vision that has been set ed by the level of corruption in a country.
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One data set that indicates accounting fraud observed through the theory of moral develop-
in financial statements is the audit result of the ment, as used in ethics research.
Government Audit Board (Badan Pemeriksa Ramamoorti (2008) stated that the rationa-
Keuangan) for the Local Government Financial lization and pressure are causal factors of
Statement (LKPD) in 2013. An unqualified accounting fraud, based on the psychological
opinion is the best opinion given by the BPK for condition of the perpetrator. Dorminey et al.
the local governments or institutions with good (2011) stated that the rationalization and
financial statements. In 2013, of the 456 local pressure factors are characteristics that cannot be
governments audited, only 34 (or 7.4 percent) of observed because it is impossible to know what
local governments received this unqualified is on the mind of the perpetrator when
opinion. This shows that the quality of financial committing accounting fraud.
reporting in the Indonesian government system
Accounting fraud is closely related to ethics.
is not good enough. If the reporting quality is not
It is also an illegal act. According to Hernandez
good enough, the accountability for regional
and Groot (2007), accounting fraud is illegal
economic resources management is ques-
behaviour that is generally a part of unethical
tionable. In the first quarter of 2014, BPK
behaviour; therefore there are laws that must be
examined 670 statements from various areas of
implemented as part of the efforts to enforce
the government system. There were 14,854 cases
moral standards. Research from Hernandez and
of non-compliance worth Rp30.87 trillion.
Groot (2007) found that ethics and the
According to Wells (2007), accounting fraud accounting controls environment are vital
refers to accounting errors made intentionally variables relating to the tendency of someone to
with the purpose of misleading the readers/users commit accounting fraud. Albrecht and Albrecht
of the financial statements. The fraud is done (2004) pronounced that the personal integrity
with a negative motivation to take advantage of factors in the fraud scale refer to a personal code
individuals or certain parties. According to the of ethics possessed by each individual.
Association of Certified Fraud Examiners
Several studies in the field of ethics (Arnold
(ACFE) in 2013, accounting fraud can be
& Ponemon, 1991; Welton, et al. 1994; and
classified into three types: Fraud in the financial
Liyanarachi & Newdick, 2009) use the moral
statements, the misappropriation of assets, and
development theory to observe individuals
corruption. Based on the investigations above,
tendencies to conduct an action. The notion that
such types of fraud are reported in Indonesia.
is commonly used is the theory of Kohlberg's
In 1973, Donald Cressey, an American level of moral reasoning. Knowing one's level of
criminologist and sociologist stated that there are moral reasoning would be the foundation to
three factors that cause accounting fraud, determine the tendency of individuals to perform
namely: opportunity, rationalization, and a certain action, specifically with regard to
incentive/pressure. These three factors are called ethical dilemmas
the fraud triangle. In 1984, Albrecht, an
Welton et al. (1994) states that an indivi-
accounting doctoral candidate, proposed a fraud
dual's ability to resolve ethical dilemmas is
scale which contains three factors that lead to the
influenced by the level of his moral reasoning.
occurrence of fraud, which are the situational
Wilopos research (2006) found that individuals
pressure, the opportunity to commit fraud and
with high levels of moral reasoning are less
personal integrity. The study of Albrecht et al.
likely to attempt accounting fraud. Bernardi
(1984) reinforces Cresseys earlier study.
(1994) and Ponemon (1993), as cited in
Albrecht replaced the rationalization factor with
Moroney, and McDevitt (2008), found that the
personal integrity to make it more observable.
higher the level of ones morality is, the more
Personal integrity refers to a personal code of
sensitive that person is to ethical issues.
ethics of an individual. This integrity can be
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In addition to the rationalization that is various ways, including embezzlement of the

closely related to ethics, another factor that receipts for goods/money, property theft, or
causes accounting fraud is opportunity. One of actions which cause an entity to pay for goods or
the sources of opportunity is weak internal services that are never received by the entity.
controls. Coram et al. (2008) explained that an The misappropriation of assets can be
organization which has a strong internal audit accompanied by a note or a document that has
function will be able to detect accounting fraud. been falsified or is deliberately misleading, and
Research from Hogan et al. (2008) found that can be related to one or more individuals among
auditors play a significant role in reducing the employees or third parties.
opportunities for accounting fraud. Research into In the fraud triangle, there are three factors
local governments conducted by Puspasari that cause accounting fraud: rationalization,
(2009) found that the heads of districts tend to pressure and opportunity. In the fraud scale,
commit fraud when the internal controls are not there are three factors that lead to accounting
effective. fraud: situational pressure, the opportunity to
This study elaborates on the theories for conduct fraud, and how individuals rationalize
accounting fraud and ethics in the context of something called personal integrity. Albrecht
local governments in Indonesia. Based on the and Albrecht (2004) replaced this rationalization
data from BPS, local governments are the most factor with personal integrity in order for it to be
corrupt institutions in Indonesia. Individual observable. Through personal integrity, the
levels of morality (high and low) and the observation of individual decisions and the
elements of the organization's internal controls decision-making process would be closer to the
(their presence or absence) are the factors that goal of finding ethical decision making.
are examined as the causes of the accounting According to Albrecht and Albrecht (2004), a
fraud by this research. violation of ethics, honesty and responsibility are
at the core of accounting fraud. Ethical problems
LITERATURE STUDY AND HYPOTHESES caused by rationalization, and with some expan-
DEVELOPMENT sion, the pressure factor, could be associated
with fraud by looking at the condition of the
Accounting Fraud
individuals who perform acts of fraud when
In 2013, the Association of Certified Fraud considering the truth or not of such allegations.
Examiners (ACFE), one of the associations in
the United States that puts a lot of effort into Moral reasoning
preventing and reducing fraud, categorize fraud One of the theories of moral development
into three groups: financial statement fraud, asset that is widely used in ethics research is
misappropriation, and corruption. In 2001, the Kohlbergs model. Kohlberg (1969), as cited in
Indonesian Institute of Accountants (IAI) McPhail and Walters (2009), stated that morals
described accounting fraud as: (1) misstate- develop through three stages, namely the pre-
ments, arising from a fraudulent financial conventional, conventional, and post-conven-
reporting misstatement or omission, is swindling tional stages. Welton et al. (1994) stated that an
to manipulate a financial report to deceive its individual's ability to resolve ethical dilemmas is
users, (2) misstatements, arising from the influenced by their level of moral reasoning. The
improper treatment of assets (often referred to results of several studies presented by
misuse or embezzlement), relating to the theft of Liyanarachi & Newdick (2009) showed that the
said assets from entities that does not result in level of an individuals moral reasoning will
financial statements being presented in affect their ethical behavior. People with a low
accordance with the Generally Accepted level of moral reasoning behave differently to
Accounting Principles (GAAP) in Indonesia. people who have a high level of moral
The misappropriation of assets can be done in reasoning, when facing ethical dilemmas.
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According to Rest (2000), the higher a person's elements are: control of the environment, risk
level of moral reasoning is, the more likely they determination by the management, the account-
will be to do the 'right thing'. ing information systems, communications,
In the lowest stage (pre-conventional), an control activities and monitoring. Meanwhile,
individual will perform an act because they feel according to Mulyadi (1998) there are four basic
afraid of the law/rules. In addition, an individual elements that need to be considered, namely:
at this moral level will also see their personal 1. The organizational structure that separates the
interests as the main reason for taking this functional responsibilities of the firm.
action. In the second stage (conventional), the 2. An authority system and recording proce-
individual will base his/her actions on the dures that provides adequate protection to the
approval of friends and family, and also on the assets, debts, income and expenses.
norms that exist in the community. At the
3. The establishment of healthy practices for
highest stage (post-conventional), the individual
carrying out the duties and functions within
takes action with regard to the interests of others
the organization.
and such actions are based on universal laws.
4. Employees whose qualities are in accordance
According to Welton et al. (1994), in
with their responsibilities.
every stage of Kohlberg, individuals have their
own views about what is 'the right thing'. Boynton and Johnson (2006) defined control
Individuals in stage one feel that the right thing activities as policies and procedures that help
is what is in the interests of the individual. ensure that managements orders have been
Individuals in stage 2 assume that the right thing actioned. Controls help ensure that the necessary
is the result of the exchange of the draw and peer actions are taken with regard to the risks to the
or family approvals. Individuals in stage 3 feel achievement of the organizational goals. The
that the right thing relates to the expectations of definition of an internal control system,
trust, loyalty, and respect from friends and according to Peraturan Pemerintah No. 60/2008
family. Individuals in stage 4 assume that the on Satuan Pengawas Internal Pemerintah (SPIP)
right thing is to make a contribution to their is:
society, group or institution. Individuals in stage A system of internal control is a process that
5 and stage 6 assume that truth is based on the is integral to the actions and activities carried
out continuously by the management and all
principle of ethical principles, the equality of
employees to provide reasonable assurance
human rights and dignity as a living being.
on the achievement of the objectives of the
organization through effective and efficient
Internal Control management, the reliability of the financial
Coram et al. (2008) explained that an reporting, the safeguarding of state assets,
organization which has an internal audit function and compliance with the laws and
will be able to detect accounting fraud. Hogan et regulations.
al. (2008) discussed the role of auditors in Internal control is the critical factor to make
reducing the opportunity factor for accounting sure of the financial accountability of local
fraud. According to Bastian (2006), accounting government institutions. Each Satuan Kerja
controls are part of the internal control system, Perangkat Daerah (SKPD) receives and uses a
including organizational structures, methods, budget for running its duties and functions,
and measurements, which are coordinated therefore, it has an obligation to make a financial
primarily to keep the wealth of the organization, statement detailing its use of the budget. The
as well as checking the accuracy and reliability financial accountability of the government
of the accounting data. agencies of districts/cities is an embodiment of
According to Arens and Loebbecke (1996), the accountability of the government agency for
there are five elements of internal controls that the implementation of the regional budget in
should be owned by the organization. Those running the programmes and activities necessary
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to carry out the mission of the organization, in those who have a low level of moral reasoning
order to achieve the goals and objectives that tend to do things that benefit them, and avoid
have been set for it. things that can lead to legal sanctions.
This study also argues that an individuals
Hypothesis morality will affect that person's propensity to
The American Institute of Certified Public commit accounting fraud. That is, the higher the
Accountants (2009) explained that internal stage of an individuals morality (post-conven-
controls are very important, among other things, tional stages), the more the individual pays
to provide protection for the entity against attention to the wider interests and universal
human weaknesses and to reduce the possibility needs, rather than mere organizational interests,
of errors or actions that do not comply with the and especially the interests of the individual.
rules. Coram et al. (2008) explained that an Thus, the higher the morality of the individual is,
organization which has an internal audit function the more he/she will try to avoid the tendency to
will be able to detect accounting fraud. Research commit accounting fraud.
from Hogan et al. (2008) discussed the role of Individuals with higher levels of moral
auditors in reducing the opportunity factor for reasoning behind their actions will consider the
accounting fraud. An internal control system, in interests of the people around them, and base
order to function properly, needs an element of their actions on moral principles, and then the
internal control. To achieve effective, efficient, presence or absence of elements of internal
transparent, and accountable financial mana- control would not make them attempt accounting
gement, according to BPK (2013) there must be fraud that would be detrimental to their organi-
control over the implementation of government zation and society. According to Graham (1995)
activities by applying the elements of internal and Patterson (2001), as cited in Moroney and
control. According to Lovell (1997), the rules in McDevitt (2008), individuals with higher levels
an organization are a form of internal controls of moral reasoning for their actions will be
that serve as a tool to ensure the organizational steered by the principles of universal morality.
goals are achieved. Internal control is one of the
A situation where there is either the presence
factors that will be examined as the cause of
or absence of internal controls can cause
accounting fraud in this research. Coram et al.
individuals with low moral levels to perform, or
(2008) found that organizations that have an
not to perform, accounting fraud. However, for
internal audit function are able to detect and
individuals with high moral principles, the
report accounting fraud themselves. Hogan et al.
presence or absence of such internal control
(2008) found that internal auditors play an
elements in an organization will not make them
important role in reducing the chance factor in
perform accounting fraud, since that would be
accounting fraud.
detrimental to the organization and society.
Another factor causing accounting fraud that Based on this, the authors formulate our first
will be examined in this research is the ethical hypothesis:
factor that is closely related to an individuals
morality. Welton (1994) stated that an indivi- H1. The condition of the internal control ele-
dual's ability to resolve ethical dilemmas is ments affects the relationship between the
influenced by their level of moral reasoning. The levels of public sector managers morals,
results of several studies presented by Liyana- and their tendency to commit accounting
rachi and Newdick (2009) showed that the levels fraud.
of moral reasoning of individuals will affect In the fraud scale, when situational pressures
their ethical behaviour. People with a low level and opportunities to commit fraud are high and
of moral reasoning behave differently to people personal integrity is low, the possibility of
who have a higher level of moral reasoning, committing fraud is very high. The opportunity
when facing ethical dilemmas. By their actions, here is provided by the condition of the internal
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controls in the organization. According to internal control elements, rather than when
Albrecht and Albrecht (2004), one of the the internal control elements are present.
motivations for individuals to perform
accounting fraud is a desire for personal gain. METHOD
In the absence of the element of internal Procedure and Task Participants
controls within an organization, individuals with
lower levels of moral reasoning tend to exploit The researchers created a series of proce-
these conditions for their personal use (self- dures to be undertaken by the participants,
interest), for example, by actions relating to allowing the experiment to be run according to
accounting fraud. These conditions correspond the planned manipulation. Each participant was
to those in the pre-conventional level of given an envelope. Inside the envelope were two
Kohlberg's levels, where individuals who have assignments. The first assignment was to
low levels of moral reasoning have, as their main measure the individuals moral reasoning. In this
motivation, fraud for gain and for their personal assignment, the participant was asked to read
use (in accordance with stage two Kohlberg). four scenarios featuring ethical dilemmas, and to
Meanwhile, individuals with higher levels of give their judgement on each scenario. The
reasoning, when facing the absence of internal instrument for moral reasoning was developed
control elements in their organization, will not from Rest (2000). Their judgement scores will
perform unethical accounting fraud, as that be used to measure their level of moral
would bring losses to many parties. reasoning.

In Kohlbergs moral levels, obeying the The second assignment was to measure their
existing rules to avoid certain penalties is tendency to commit accounting fraud. The
included in the lower stages (the pre- participant was given a scenario that contains
conventional level). Individuals with low moral information about their role in the experiment. In
reasoning, when faced with the presence of this case, the respondent is given the scenario
internal controls, are less likely to commit that he/she is a manager in local government
accounting fraud because they fear their deeds (Head of Department X). In this scenario, the
will be detected by the organizations internal participant is given an understanding of their
controls, and they will receive legal sanctions. background as the head of Department X and the
This is in accordance with the stage one model conditions that exist in the organization they
of Kohlberg's moral development. There is lead. In this assignment, there are three types of
empirical evidence from Graham (1995) and fraud listed: asset misappropriation, fraudulent
Patterson (2001), as cited in Moroney and financial reporting and corruption. If the
McDevitt (2008), who found that individuals participant decides to conduct a fraudulent
with lower levels of moral reasoning are more tender, it means he/she is committing those three
regulatory and legal sanctions oriented. Based forms of fraud.
on this, the second and third hypotheses are: The experimental scenario in the first assign-
ment uses the third-person context as suggested
H2. In the absence of internal control elements, by Rest (1986), as cited in Liyanarachi and
public sector managers who have low levels Newdick (2009), for research into ethics. This is
of moral reasoning tend to commit reinforced by ethics studies conducted by Arnold
accounting fraud, compared to public sector and Ponemon (1991), and Bernardi and Guptill
managers who have higher levels of moral (2008), which also used the third-person context.
There were two manipulation check ques-
H3. Public sector managers with lower levels of tions in the experiment. Both questions were
moral reasoning tend to commit accounting about the working condition in Department X as
fraud when faced with the absence of illustrated in the scenario. Manipulation checks
aim to measure whether participants truly read
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the complete scenario or not. If participants were Group 1, the group with high morals and the
wrong with their answers to those two questions, presence of internal controls, (2) Group 2, the
they were eliminated. If they only answered one group with high morals but the absence of
question correctly, they were still counted as internal controls, (3) Group 3, the group with
experiment participants. low morals and the presence of internal controls,
and (4) Group 4, the group with low morals and
Participants the absence of internal controls. The
experimental design can be seen in Table 1.
Participants in this study were masters
degree students in the Economic Development Table 1. 2x2 Experiments Design
Programme (MEP) at UGM, and used as
Moral Reasoning Internal Control Element
surrogates for public sector managers (heads of
Level Presence Absence
local government institutions/head of the
SKPD). The public sector manager (head of the High Group 1 Group 2
SKPD) is the highest decision-maker in that
institution. In addition, under Permendagri 21 Low Group 3 Group 4
article 10, the head of the SKPD is responsible Source: Experiments design in the article
for the institutions financial statements.
The reasons for selecting students as Variables and Research Instruments
surrogates were based on Betts (2009) research. In this study, there is one dependent variable,
That research found that perpetrators with a the tendency to commit accounting fraud.
masters education level (S-2) committed fraud According to the ACFE (2013), there are three
more frequently than those who only possess a types of accounting fraud: financial statement
graduate level degree (S-1). The second reason fraud, the misappropriation of assets, and
was the S-2 students of MEP UGM have a corruption. The accounting fraud variable is
greater number of government lectures than measured by asking the participants to give their
other economic majors do. The third and the opinions on a question representing three types
strongest reason was that all of the participants of accounting fraud. The participants answer the
were government employees. They already had a question after reading the experimental scenario.
basic understanding about the governments A Likert scale of 1-7 is used to measure the
circumstances. Therefore, they were expected to response of the participants. The higher the
understand the public sector managers participants score, the more likely they are to
characteristics in the experimental scenario. A commit fraud.
total of 70 students participated in this The independent variables in this study are
experiment. individual morality (high level and low levels of
morality) and internal controls (the presence or
Experimental Design absence of internal controls). The measurement
This study used a 2x2 factorial experimental of individual morality comes from the moral
design to test the influence of individual mora- measurement model developed by Rest (2000) in
lity and internal control on accounting fraud. the form of the Defining Issues Test (DIT). This
The dependent variable in this study is instrument shapes cases with an ethical dilemma.
accounting fraud, while the independent variable Individual morality is measured by an instru-
is individual morality (high and low levels of ment developed from Rest (2000) to measure the
morals) and internal controls (the presence or level of moral reasoning of individuals through
absence of internal controls). four scenarios with ethical dilemmas. The level
of moral reasoning is divided into two
The researchers observed the tendency of the
categories, low and high, using the median value
individuals to commit accounting fraud by
of the P-score from the total sample.
dividing the participants into four groups: (1)
2016 Puspasari and Suwardi 215

The existence of the elements of internal participant. The result of the analysis indicates
control is illustrated through the application of that, for the manipulation check of the 70
authority and responsibility in the organization, participants, only a total of 57 participants (81.4
its periodic transaction records, the presence of percent) passed the manipulation check. Thirteen
physical controls, a comprehensive accounting participants (18.6 percent) did not pass it.
system, as well as periodic monitoring and
evaluations. The absence of internal control Experimental results
elements in the scenario are depicted in the form The purpose of this study is to compare the
of a lack of any implementation authority and morality among groups. Analysis of Variance
clear responsibility in the organization, the (ANOVA) is a suitable statistical test to use
recording of transactions which are not periodic, here. ANOVA can test more than one treatment
the lack of physical controls, an accounting and this is its major advantage compared to the t-
system that cannot record all the operations of test. A normality test is performed to determine
the agency and the lack of periodic monitoring whether the data in this study is normally
and evaluations of the agency. To develop the distributed. The test results from Kolmogorov-
instrument, the researchers discussed these Smirnovs normality test show the signification
matters with some government employees who (over 0.005). From that result, it can be stated
are familiar with these issues. After the that the data are normally distributed, and meets
instrument was created, the researchers tested it one of the ANOVAs assumptions. Tests for the
by conducting a pilot test. Some refinements homogeneity of the variance were conducted to
were made after this pilot test. determine whether the four groups (Groups 1, 2,
3, and 4) have the same variance. Statistical
RESULTS analysis showed a Levene statistic value of
Manipulation Check 0.176 (over 0.005). This suggests that each
group of subjects did fulfil the same variant and
A manipulation check was done by testing have met the assumptions of ANOVA (Hair et
the participants to determine the right or wrong al., 2006), while the ANOVA between the
of two questions. The first question was about groups showed a significant p-value of 0.000.
the participants task as the Head of Department These results indicate that there are significant
X. The second question related to elements of differences between the groups. To answer the
the internal controls in Institution X. The hypotheses, the following tables will show the
manipulation checks aimed to measure whether levels of the individuals moral influence and the
the participants truly read the whole of the elements of internal control over their account-
scenario or not. If participants gave the wrong ing fraud propensities, and a statistical descrip-
answers to those two questions, they were tion of the differences between the groups.
eliminated. If they only answered one question
incorrectly, they were still counted as a

Table 2. The Effect of Morality Levels and the Internal Control Elements on the
Propensity to Commit Fraud
Source df Mean Square F Sig. Partial Eta Squared
Corrected model 3 15,798 22,338 0.000 0.558
Intercept 1 264,221 373,603 0.000 0.876
Morality 1 22,078 31,217 0.000 0.371
Elemen PI 1 9,105 12,874 0.001 0.195
Morality*ElemenPI 1 16,179 22,877 0.000 0.301
Error 53
Source: ANOVAs data
216 Journal of Indonesian Economy and Business May

Table 3. Group Statistics Description means that the presence or absence of internal
Moral controls does not affect the decision of public
Internal Control Element
Reasoning sector managers who have high morals to
Level Presence Absence commit accounting fraud.
Group 1 Group 2 Table 4. Tukey t-statistics
Mean=1.6667 Mean=1.4000
High S.D. (0.81650) S.D. (0.50709) Mean
n=15 n=15 Difference P-Value
Group 3 Group 4 Group 1 and 2 0.2667 0.30708 0.821
Mean= 1.8462 Mean=3.7143
Group 4 and 2 2.3143* 0.31251 0.000
Low S.D. (0.89872) S.D. (0.89258)
n=13 n=14 Group 4 and 3 1.8681* 0.32391 0.000
Source: ANOVAs data
Source: ANOVAs data
The results of this study prove what is in the
The first hypothesis states that the condition stages of moral development in Kohlberg's
of the internal control elements will affect the hierarchy. The higher the stage an individuals
relationship between the levels of public sector morality is at (the post-conventional stages), the
managers morals and their tendency to commit more that individual pays attention to the
accounting fraud. From Table 2 it can be seen interests of the broader world and society around
that there is an interaction between the morality him/her, rather than mere organizational
level and the elements of internal control (F = interests, and especially personal interests.
22,877 with a p-value of 0.000). Evidence of the Public sector managers with high levels of
strength of the effect of the interactions morality tend not to commit accounting fraud
variables indicates that there is interdependence under any circumstances.
between the morality levels of the individual Public sector managers with higher levels of
with the condition of the internal control moral reasoning for their actions will consider
elements, thus the first hypothesis is supported. the interests of the people around them and their
The presence or absence of internal controls actions will be based on moral principles, rather
in an organization will make public sector than the presence or absence of the elements of
managers with a certain level of morality tend to internal control, and will not make them commit
commit accounting fraud. Changes in the levels accounting fraud. They will not misuse their
of the internal controls will have an impact on positions for their own benefit. The results of
the likelihood of public sector managers with this study also strengthen the results of ethics
certain morality levels (high or low) performing studies previously conducted by Liyanarachi and
accounting fraud. Table 3 shows the mean Newdick (2009), Arnold and Ponemon (1991),
difference in each group with a certain level of Welton et al. (1994), Graham (1995) and
morality and the condition of the elements of the Patterson (2001), as cited in Maroney and
internal controls. To determine the significant McDevitt (2008), that stated that individuals
group mean difference, a post-hoc analysis was who have higher levels of moral reasoning will
then performed. be more sensitive to ethical issues, so they will
Based on Table 3 and Table 4 of Tukeys t- tend to act ethically.
statistics, the researchers compared the mean of The second hypothesis states that in the
Group 1 and 2 to see the effect of the internal absence of internal control elements, public
controls on accounting fraud. From the sector managers who have low levels of moral
comparison of the two groups they obtained a reasoning tend to commit accounting fraud,
mean difference of 0.2667 with p = 0.821. These compared to public sector managers who have
results indicate that there is no significant higher levels of moral reasoning. From Table 3
difference between Group 1 and Group 2. This and Table 4, we compare between Group 4 and
2016 Puspasari and Suwardi 217

Group 2, which represents the hypothesis. From they will not attempt to carry out accounting
the comparison of the mean of both groups, a fraud that would cause them to be punished if
mean difference of 2.3143 is obtained with p = caught. The results of this study support the
0.000. These results indicate that there are research of Maroney and McDevitt (2006), who
significant differences between Group 4 and found that regulations can be an effective
Group 2. Public sector managers who have low deterrent to someone thinking about doing
levels of moral reasoning (Group 4) are more something that is not in accordance with the
likely to commit accounting fraud compared to existing rules. According to Lovell (1997), the
public sector managers who have a higher level rules of an organization are a form of internal
of moral reasoning (Group 2), in the event there control that serves as a tool to ensure the
is no element of internal control. Thus, the third organizational goals are achieved.
hypothesis is supported.
In the absence of internal controls within DISCUSSION AND CONCLUSIONS
their organization, public sector managers with The purpose of this study is to compare the
lower levels of moral reasoning will exploit propensity to commit accounting fraud among
these conditions for their personal use (self- public sector managers who have low or high
interest), by committing accounting fraud. This levels of moral reasoning in the presence or
is consistent with the existing stage 2 in absence of internal control elements. The results
Kohlberg (the pre-conventional level), where of this study indicate that there are interactions
individuals who have low levels of moral rea- between public sector managers moral levels
soning have the main motivation for their and the internal controls. Changes in one level
corruption being that it is done for their personal will cause changes in their possibility of
gain. committing fraud. For example, changes in the
The third hypothesis states that public sector level of morality or changes in the internal
managers with lower levels of moral reasoning controls can make people who previously did not
tend to commit accounting fraud when faced think about committing fraud become fraud
with the absence of internal control elements, perpetrators and vice versa. This is seen from the
rather than when they are present. Based on support for the first hypothesis.
Table 3 and Table 4 of Tukeys t-statistics, we Since controlling individuals moral reason-
compare the mean of Groups 4 and 3 and obtain ing is impossible, internal controls can be tools
a mean difference of 1.8681 with p = 0,000. The that are able to reduce the propensity to commit
mean for Group 3 was 0.89872, which is lower accounting fraud by individuals with a low level
than the mean of Group 4 (3.7857). This means of moral reasoning. The results of the second
that public sector managers with lower levels of and third hypothesis prove that in the presence
moral reasoning in the absence of internal of internal controls, public sector managers who
control elements (Group 4) tend to commit have a low level of moral reasoning tend not to
accounting fraud compared to public sector commit accounting fraud. In contrast, in the
managers with lower levels of moral reasoning absence of such internal controls, public sector
in the presence of internal control elements managers with lower levels of moral reasoning
(Group 3), thus the fourth hypothesis is will tend to commit accounting fraud.
There are three important contributions by
The results of this study also support the this research. First, each government institution
research of Graham (1995) and Patterson (2001), is expected to have elements of internal control,
as cited in Maroney and McDevitt (2008), that because it is proven to be effective in preventing
found that individuals with low levels of individuals with low morality levels from
reasoning are more regulatory and legally committing fraud. Second, this study will
oriented because they do not want to be encourage other studies into fraud in government
punished, so in the presence of internal controls, institutions to use the experimental method. So
218 Journal of Indonesian Economy and Business May

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