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Dwirahmadanidavis 1710533005 PDF
Dwirahmadanidavis 1710533005 PDF
PROPOSSED BY:
DWI RAHMADANI DAVIS
1710533005
I. Preliminaries
I.1 Abstract
At this time, it is common knowledge for management or certain parties to commit fraud
in financial reporting to eliminate certain obligations for the company or to obtain profits for
related parties. Therefore, This paper aims to see how auditors can detect fraudulent financial
reporting by developing standard rules that generally apply. Based on the results of several
previous studies, the auditor can conclude that there are some factors that can influence an
auditor to detect fraud in financial reporting. This factor was discovered by Donald Cressey in
1953 called as the fraud triangle, then Wolfe and Hermanson (2004) added the capability factor.
So, it was known as Diamond Fraud Theory, in which there was a variable capable of detecting
fraud that consist of pressure, opportunity, rationalization and capability. This study utilizes
earnings management to find the possibility of fraudulent financial reporting. in this study using
descriptive research method that explains the characteristics of an event or experience that can be
used as a fraud detection factor. Data collection methods used include the literature research
method because this research is a qualitative research. The findings of this study that the fraud
diamond theory can be used in predicting fraud by utilizes earning management to find that
possibility to commit fraud.
I.2 Table of Contents
I. Preliminaries........................................................................................................................2
I.1 Abstract................................................................................................................................2
I.2 Table of Contents................................................................................................................3
II. Text......................................................................................................................................4
II.1Introduction..........................................................................................................................4
2.2. Main Body..........................................................................................................................6
2.2.1 Fraud...........................................................................................................................6
2.2.2 Auditor’s Ability to Detect Fraud...............................................................................7
2.2.3 Fraud Triangle Theory................................................................................................9
2.2.4 Fraud Diamond Theory.............................................................................................10
2.2.5 Earning Management................................................................................................11
2.3 Conclusion.........................................................................................................................12
III. Reference Materials...........................................................................................................13
ii. Text
2.1 Introduction
Financial statements are an important instrument for the company as long as the company
is still operating because in the financial statements there are important information about the
company's financial condition. Such information can identify a company's position whether
stable or not. That is what investors will use to make investment decisions. These financial
statements are not only used to make investment decisions but can also be used for companies to
conduct internal evaluations such as management performance appraisal, tax calculations to be
issued and accountability to the public (Nurbaiti & Hanafi, 2017). Therefore, financial
statements are not presented haphazardly but must have criteria that meet such financial
statements must be relevant, clear, complete, easily understood by users, and easily accessible to
users, and the most important is the financial statements must be verifiable because many parties
can use financial statements to commit fraud in financial reporting (Sihombing & Rahardjo,
2014).
Fraudulent financial reporting is often done by top-level managers or people who have
more power in the company so they are easy to commit fraud. The fraud was carried out by
means of increasing income through eliminating debt or other obligations. However, sometimes
the company also deliberately reduces revenue in the current year to be reserved in the following
year so that the company's financial position is considered stable by investors. This practice is
often called earnings management. One form of earnings management is income smoothing,
namely by way of expenditure and income is transferred between periods to reduce income
fluctuations. One way of income smoothing is to reduce the value of inventories and other assets
acquired from other companies at the time of acquisition, then sell those assets at a high price so
that the company will get a profit. This has been practiced by Worldcom and Enron but
apparently it has also been done by several manufacturing companies in Indonesia such as PT
Waskita Karya, PT Kimia Farma, etc. Therefore the role of the auditor profession must be more
effective so fraud can be detected as early as possible before developing (Arens et al, 2011).
Because of that, AICPA publishes SAS no 99 which can provide guidance to auditors to
be able to detect factors that cause someone to commit fraud. One of the researcher found that
there are 3 factors that cause someone to commit fraud, namely pressure, opportunity, and
rationalization, known as fraud triangle (Puspitadewi & Sormin, 2014). According to Wolfe and
Hermanson (2004), the fraud triangle will succeed in detecting factors that result in fraud if
added to the capability factor as known as fraud diamond. There have been many uses of the
fraud diamond theory used by researchers to detect factors that cause someone to commit fraud
in a manufacturing company.
There are still some differences between one research with another such as Sihombing &
Rahardjo (2014) states that only the opportunity factor that encourages cheating but Puspitadewi
& Sormin (2014) states that the factors that encourage cheating on manufacturing companies are
rationalization, etc. Therefore, research on this still needs to be done. So, this study aims to
analyze the factors that drive fraudulent financial reporting through diamond fraud which consist
of some elements, namely, financial stability, external pressure, financial targets, nature of
industry, ineffective monitoring, audit opinion and change of directors. Based on the introduction
of the diats, the formulation of the problem in this paper is how the influence of diamond fraud
in detecting factors that falsify financial statement fraud on manufacturing companies listed on
the Indonesian stock exchange.
2.2 Main Body
2.2.1 Fraud
Fraud is a common way carried out by humans based on intelligence they have either
done by themself or through other people to benefit through misrepresentation. Fraud can not be
detected basically because fraud is a bad behavior that exists in humans that is used to cheat
others (Skousen & Twedt, 2009). Fraud is common in the business world or the world of work in
various forms which are sometimes difficult to detect. All forms of fraud are used to harm one
party but give benefit to the other party. Therefore, to make it easier to detect fraud, the
Association of Certified Fraud Examines in 2016 created a chart that illustrates the fraud scheme
that often occurs in the world of work. The scheme is known as a fraud tree consisting of
corruption, misappropriation of assets and fraudulent financial reporting (Suryandari & Yuesti,
2017). They are :
1. Corruption is the most difficult act of fraud detected by the auditor because basically
corruption upholds the principle of cooperation which means that corruption is usually
not committed by one person but has involved other parties. The cooperation can be in
the form of misuse of power held in a company through violation of personal duties or
duties of superiors, bribery, accepting gifts with any intentions and objectives as well as
coercion from the authorities that require a person to commit corruption based on
instructions given to him. It aims to get personal benefits both directly and in cooperation
with other parties.
2. Missappropriation asset is an act of fraud on a small scale or the amount being cheated is
not material for financial statements. This cheating is easily detected because it is
physical so it can be calculated. This form of fraud is usually done by employees within
the company by means of abusing the tasks assigned to gain profits in the form of
company assets or assets. Although this fraud is small-scale, it is still a concern of
management because a small fraud if done continuously will be a large amount. This
fraud is not only committed by employees, some cases can also involve top management
in the search for company assets as did the former CEO of Tyco International who was
charged by the SEC for stealing more than $ 100 million in company assets. Therefore,
auditors must be more careful in calculating asset theft by both employees and top
management (Arens et al, 2011)..
3. Fraudulent financial reporting is an action taken by top-level managers to cover the actual
financial condition of a company. This is done by top-level managers by engineering
financial statements to obtain profits from the company's operating income. not only
financial statement engineering, fraudulent financial reporting can also be in the form of
embezzlement of company assets that can cause financial statements to be inconsistent
with the actual situation because they are not guided by IFRS so that embezzlement can
produce attractive profits. This practice is known as window dressing (Siddiq &
Hadinata, 2016). According to SAS No.99, financial statement fraud can be done by
(Susanto, 2018) :
a) Manipulation, falsify or make changes to the information in accounting records,
as well as supporting documents from the prepared financial statements.
b) Accidental errors or omissions in important information on financial statements.
c) Intentional misuse of principles relating to numbers, classifications, ways of
presentation or disclosure.
2.3 Conclusion
In detecting fraudulent financial reporting can be done using fraud diamond analysis
followed by the auditor's ability to detect fraud. Diamond fraud is a theory used to identify the
factors that drive a person to commit fraud. This fraud diamond theory was put forward by David
T. Wolfe and Dana R. Hermanson which is the development of the fraud triangle theory which
consists of pressure, opportunity, rationalization and by adding capability factors. Pressure
factors can be identified by financial target variables, financial stability, and external pressure.
The opportunity factor is identified by the variable nature of industry and ineffective monitoring.
while the rationalization factor is identified by the auditor change variable and audit
opinion.Fraudulent financial reporting is often done by top-level managers or people who have
more power in the company so they are easy to commit fraud. The fraud was carried out by
means of increasing income through eliminating debt or other obligations.
However, sometimes the company also deliberately reduces revenue in the current year to
be reserved in the following year so that the company's financial position is considered stable by
investors. Fraudulent financial reporting is usually done by management through earnings
management because earning management is a way that managers do to modify income by
reducing or increasing revenue. This is done by using income smoothing in the form of income
adjustments in the years during which the company operates to be considered stable by
shareholders so that it does not eliminate investor interest in investing. Earning management
practices are expected to be detected by the auditor with the capabilities they have and made
easier by fraud theory diamonds. Fraud theory diamond is expected to be used as a detection
factor that can predict earnings management practices in a company