DETERMINANT OF FINANCIAL STATEMENT FRAUD :

PERSPECTIVE OF FRAUD DIAMOND THEORY

(Empirical Study On Indonesian Banking Sector 2011-2015)

Suhartinah Bambang Agus Pramuka

Jenderal Soedirman University Jenderal Soedirman University
tinnitinnie@gmail.com bpramuka@gmail.com

Warsidi
Jenderal Soedirman University
warsidi@hotmail.com

ABSTRAKSI
Penelitian ini bertujuan untuk menguji pengaruh elemen-element fraud dalam teori fraud
diamond terhadap indikasi financial statement fraud yang terjadi di sektor perbankan Indonesia
pada tahun 2011-2015. Fraud diamond adalah pengembangan lebih lanjut dari teori fraud triangle
yang mencakup financial targets, financial stability, institutional ownership, external pressure,
external auditor quality, changes in auditors, dan change in directors.

Indikasi adanya financial statement fraud yang ditunjukkan dengan adannya discretionary
accruals merupakan variabel dependen dalam penelitian ini. Sampel dipilih dengan menggunakan
metode purposive sampling, yaitu dari 30 perusahaan sektor perbankan yang terdaftar di Bursa
Efek Indonesia selama periode tahun 2011-2015 dengan total 150 perusahaan observasi. Analisis
data dilakukan dengan menggunakan metode regresi berganda.
Hasil ini penelitian menunjukkan bahwa (1) ) financial targets, financial stability, dan
external auditor quality berpengaruh positif terhadap terjadinya financial statement fraud, (2)
external pressure berpengaruh negatif terhadap terjadinya financial statement fraud , (3) dan
institutional ownership, change in auditor dan change in directors tidak memiliki pengaruh
terhadap terjadinya financial statement fraud.

Key Words: Financial Statment Fraud, Fraud Diamond, Discretionary Accruals

1. Introduction
Financial statement is a tool for company to provide the information for its users that not only
produce information that consists of number, but also about both financial position and the financial
performance for making an economic decision. This thing can lead financial statement fraud, which is
later can mislead the investor and other financial statement user From many companies tha indicate
doing fraud, banking companies is the most companies that indicate doing fraud Based on a survey
conducted by the Association of Certified Fraud Examiner (ACFE) in 2016, its showed the financial
and banking sector is precisely the sector that experienced the largest cases of fraud than other sectors.
Based on a survey conducted by the Association of Certified Fraud Examiner (ACFE) in 2016 financial
and banking sector is precisely the sector that experienced the largest cases of fraud than other sectors
which is about 16.8%.
Strategic Indonesia through the Agency of Criminal Investigation noted that there are nine
banking criminal cases happened in 2010 -2011. Nine of the cases were done by the employees of the
bank either they did it by themselves or by the help from others who are not the employees. One of those
cases is a customer’s money burglary of Citibank Landmark for about Rp.16,63 billion done by the
senior relationship manager (RM) of the bank. Malinda Dee, as an RM, withdrew the customers’ fund
by the blank slis that had been signed by the customers.This case made the Indonesian Central Bank
released Surat Edaran Bank Indonesia No.13/28/DPNP dated on 9th December 2011 about the
Implementation of Anti-Fraud Strategy for Commercial Bank as an effort to prevent cases of fraud in
the banking that detrimental to customers.
The fact is, although the banking industry nowadays has a lot of policies and monitoring
parties, there are still a lot of banking fraud indication in smarter ways. Usually banking fraud is done
by the outsider, but now fraud can be done by people within the bank itself. One of the reasons of that
issue is the unconducive of the internal bank policies in minimizing the risks or opportunities for crime.
That phenomenon is reinforced by Dunn (2004), who concluded that fraud is more likely to occur when
the concentration of power in the hands of insiders (Skousen et al., 2009).

Those conditions motivates this research to be conducted for to developing a model that can
be used in detecting financial statement fraud. This study uses fraud diamond perspective (Wolfe and
Hermanson, 2004) in detecting financial statement fraud of the company. The elements of the fraud
diamond include pressure, opportunity, rationalization and capability. The elements of this diamond
fraud cannot be observed directly; it requires proxies variables. The proxies used to detect fraud in this
study include pressure proxied by financial targets, financial stability, institutional ownership and
external pressure; opportunity proxied by external auditor quality; rationalization proxied by auditor
change and capability proxied by change of director.

This study is the developed by Sihombing (2014). The differences from the prior study are :
(1) The samples of this study are banking companies that are registered in Indonesia Stock Exchange.
(2) The is research extends the year of observations become for the last 5 years with an expectation that
this study can be more actual from the previous study. 3) This research tries to prove that the financial
targets, change in auditor and capability has an influence on financial statement fraud. (4) The researcher
adds institutional ownership, external auditor quality, and change of director as a variable that is
assumed to home effect on the financial statements.
2. Theoritical Framework And Hypothesis Development

Agency Theory

Agency theory introduced by Jensen and Meckling (1976), it describes the agency relationship
that is defined as a contract in which one or more principal bind the other party (the agent) to perform
some action on behalf of the principal by delegating decision-making authority to the agent. The
managers actually act as an agent who morally responsible for maximizeing the benefit of the owner
(principal), on the other hand managers also have concerns to maximize their welfare (Ujiyantho &
Scout, 2007).
Conflict of interest between principal and agent will spark the agency problem that can affect
the quality of the reported earnings. Sihombing (2014) stated that with the conflict of interest itself, the
management as an agent will get pressure to constantly improve the company’s performance.
Management will do any effort in improving the company’s
performance, and the principal will give the management appreciation for their performance. In an
agency relationship, the manager has asymmetry information toward the external parties such as the
company's creditors and investors. Asymmetry information occurs when the manager have more internal
information about the company and know the information faster than the external parties. Asymmetry
information and potential conflicts of interest between principal and agents encourage agents to present
bias information to the principal, particularly if the information relates to the measurement of the agent
performance (Scott, 2007).

Earning Management

Scott (2000) in Widowati (2009), defined earnings management as certain accounting policies
applied by managers to achieve certain goals. Meanwhile, according to Schipper (1989) in Widowati
(2009), earnings management is intervention with the specific intent to personal financial reporting
process. There are different views whether earnings management is an legal activity or not. Some parties
considered earnings management is against the principles of accounting. While others think the earnings
management as a normal practice in preparing financial reports, especially if earnings management still
in limitation of accounting principles scopes.
The concept of earnings management by Salno and Baridwan (2000: 19) using agency theory
approach states that the practice of earnings management is influenced by conflict between the interests
of management (agent) and the owner (principal) because each party seeks to achieve the level of
prosperity they want. Conflict of interest is increasing because the principal can not monitor the daily
activities of daily management to ensure that management is working according to the wishes of
shareholders (principal). In an agency relationship, the principal does not have enough information
about agent performance. Agent has more information about the capacity of herself, work environment,
and the company as a whole. This is caused an imbalance of information or asymmetric information
owned by the principal and agent. Asymmetry of information and potential conflicts of interest between
principal and agent encourages the agent to present false information to the principal, particularly if the
information relates to the performance measurement agent. One form of the agent acts is so-called
earnings management.
Earning management can be identified by use some empirical model, that are accrual-based
models is a model that uses discretionary accruals as a proxy for earnings management, specific accrual-
based models is an approach that calculates accruals as a proxy for earnings management by using
certain financial statement items of a particular industry as well, and distribution of earnings models
(Sulistyanto, 2008 in Indrayani 2009).

Accrual Concept

The accrual basis concept is used to determine income when earned and to recognize expense
that is commensurate with income in the same period, regardless the time of cash receipts from the
related income (Widowati, 2009). The concept of accrual is used to meet the basic accounting concept
of matching. Statement of Financial Accounting Standards No. 1 on July 1, 2009, about Presentation of
Financial Statements stated that companies must prepare financial statements on the accrual basis,
except for cash. Accrual basis in the financial statements provides an opportunity for managers to modify
financial reports to produce the desired amount of profit. Financial Accounting Standards provides an
opportunity for managers to modify financial statements, so managers can generate profits as they
desired.
Detection on the earnings management posibility in the financial statements is generally
observed through the use of accrual basis. Total accruals are reflected in the profit that consists of
discretionary accruals and nondiscretionary accruals. Nondiscretionary accrual is a component of
accruals that occur along with changes in the company's activities. Discretionary accrual is derived from
the accrual component of earnings management that do by the manager (Halim, et al., 2005 in Widowati,
2009).

Financial Statement Fraud

In The Treadway Commission’s Report of the National Commission on Fraudulent Financial

Reporting (1987), Financial statement fraud is defined as discrepancy or carelessness in doing
something or not doing something supposed to be done which cause the financial report become
misleading materially.
Deliberateness in the reporting of the financial statements is material because it is presented not
in accordance Generally Acceptable Accounting Principles (GAAP), so it can influence the decision of
the interest parties also will certainly detrimental to investors and creditors. There are 3 main categories
that most likely doing this fraud, they are senior management, mid and lower level employee also
organized criminal.
\Fraud Diamond Theory

Fraud diamond is a new view of fraud phenomenon raised by Wolfe and Hermanson (2004),
which is refinement form of fraud triangle theory by Cressey (1953). The elements of fraud diamond
theory are pressure, opportunity, rationalization, and capability.

2.1. Financial Targets

The first variable of pressure are financial targets. Just like any manager of the company,
managers in the banking are always required to do the best performance to achieve certain desired profit
companies. This profit is called financial targets. Comparison of return on total assets or return on assets
is a measurement of operating performance that is widely used to indicate how efficient the assets have
been working on (Skousen et al., 2009). Return On Asset management is used to measure the gain
(profit) as a whole. The greater the ROA obtained, the greater the profit level achieved and the better
company's position in terms of use of the asset (Dendawijaya, 2005).
The emerge of pressure on the achievement of financial targets to get bonus as a reward for the
result of the performance and maintain the existence of the performance of the company can bring up
the possibility to effect of pressure on the fulfillment of financial targets to financial statement fraud.
Carlson and Bathala (1997) research in Widyastuti (2009) proved that companies that have large profits
(measured by ROA) are more likely to do profit management rather than companies with small profits.
Based on those descriptions, the research hypothesis is formulated as follows:

H1 : Financial targets positively influence on financial statement fraud in banking sector

2.2. Financial Stability

The second variable of pressure are financial stability. Financial stability is a situation where
the financial condition of a company is in a safe place or stable (Anshori, 2015)No. 99 explains when
financial stability is threatened by economic circumstances, industry, and situation operating entity,
managers face pressure to commit financial statement fraud (Skousen et al, 2009). Assessment of the
stability on the company's condition can be seen from state of its assets as reflected in the ratio of the
change in total assets.
Based on Skousen et al (2009), Mantatya and Daljono (2013), Sihombing (2014), also Tessa
and Harto (2016) indicated that the financial stability significantly affect financial reposting fraud. The
results of the Loebbecke, Eining and Willingham (1989) and Bell, Szykowny, and Willingham (1991)
also showed that cases in which the company experienced growth below the industry average, the
management may manipulate financial statements to improve the company's prospects. Based on those
descriptions, the research hypothesis is formulated as follows:

H2: Financial stability positively influences on financial statement fraud in banking sector
2.3. Institutional Ownership

The third variable of pressure are institutional ownership. Institutional ownership in this
research is a form of interpretation of factors of personal financial need contained in SAS No. 99. Most
of the shares owned by the executive management of the company will influence policy in expressing
the company's financial performance. Stock is a certificate that shows proof of ownership on a company,
and shareholders have the right to claim on the income and assets of the company. The concentration of
companies ownership in Indonesia is controlled through legal entity, according Clessen et al. (2000). As
a result, there is no clear separation between ownership and control in public company. This is the same
with the company, the condition of the banking sector also tends to be similar. When some part owned
by managers, directors, or executive council, it will automatically affect the company's financial
condition.
Institutional ownership in a banking institution would be a pressure for the institution itself.
These pressures occur because management has a greater responsibility since the responsibility goes to
not only individuals but also to the institutions. In addition, considering the shares owned by the
company which is bigger than individual shares, it pushes the management to do more effort in order to
not lose any customers and investors; one of the ways is to ‘beautify’ the financial statement through
manipulation of financial statements. Based on this matter, it can be concluded that the greater stake that
the company has, the greater the probability of banking institutions to feel more pressure and commit
financial statement fraud. Based on those descriptions, the research hypothesis is formulated as follows:

H3: Institutional ownership positively influences on financial statement fraud in banking sector

2.4. External pressure

The fourth variable of pressure are external pressure. External pressure is a state where the
company comes under pressure from external parties. Companies are often under pressure from external
parties, one of them are to maximize shareholder value through dividends or stock price. The value that
can be distributed to the shareholders will be looked at free cash flow. The greater the available free
cash flow in the company, the greater the company because it has cash available for growth, debt
payments, and dividends (Norbarani, 2012).
Meanwhile, if the free cash flow is low, it will reduce the confidence of shareholders because it
indicates that the internal performance is not sufficient to meet the investment needs of the company.
So, management may be cheating by increasing free cash flow to cover the lack of free cash flow owned.
The research of Skousen et al. (2009) and Norbarani (2012) also proved that external pressures with free
cash flow proxy significantly influence the financial statements fraud. Based on those descriptions, the
research hypothesis is formulated as follows:
H4: External pressure influences positively on financial statement fraud in banking sector

2.5. Eksternal auditor quality

The second variable of opportunity are external auditor quality. The appointment of the external
auditor by company’s audit committee is considered as a good choice because the auditor can audit
everything indepently. Hence, it can avoid conflicts of interest and to ensure the integrity of the audit
process. The research regarding to the quality of external auditor focuses on the differences between the
selection of audit services of the public accounting firm by the company, namely, BIG 4 (PWC, Deloitte,
Ernst & Young, KPMG) and non BIG 4. External auditor quality in this research is development form
of ineffective monitoring factors existed in SAS No.99.
The practice of fraud happened as an impact of weak supervision or monitoring. Thus, it gives
chances to the agents or managers to misbehave with earning management (Andayani, 2010). Fraudulent
practices or fraud can be minimized by good surveillance mechanisms and BIG 4 is considered to have
a greater ability to detect and disclose reporting errors in management. It is also proven through research
done by Lennox and Pittman (2010) and Smaili, et al., (2009), that external auditors who worked for
BIG 4 have a better ability to detect fraud compared with the auditors who worked for non BIG 4.With
some of those reasons, if a company is audited by BIG 4, the opportunity to detect the fraud will be
bigger and management will tend to be careful and avoid committing fraud because BIG 4 has more
ability to be reliable, in detecing fraud and produces higher quality audit results.Based on those
descriptions, the research hypothesis is formulated as follows:

H5: External auditor quality negatively influence external pressure on financial statement fraud in
banking sector

2.6. Change in auditor

Rationalization variable in this research proxied by change in auditor. SAS No.99 states that the
effect of change in auditor in the company can be an indication of fraud. The previous auditor may be
able to detect any possible fraud committed by management, either directly or indirectly. However, with
the change of auditors, the possibilities of fraud will increase.
The Standard Auditor Statements (PSA) No. 70 showes that the strained relationship between
management and current auditor or previous auditor is an indication of fraudulent financial reporting.
Summers and Sweeny (1998) in Kurniawati (2012) showed that clients can use the mechanism of change
of auditor to reduce the possibility of detection financial statement fraud by the company. Loebbecke et
al., (1989) in Lou and Wang (2009) showed that 36% of the fraud alleged in their samples in the initial
two-year period of auditor time. Based on those descriptions, the research hypothesis is formulated as
follows :
H6: Change of auditor positively influence financial statement fraud in banking sector

2.7. Change of director

This research use change of director as proxy of capability. Capability is a qualitative factor
which according to Wolfe and Hermanson is one of the complementary factors of the fraud triangle
theory by Cressey. Capability means how much power and capacity of a person doing fraud in an
enterprise environment. This study used change of director as a proxy of capability. Wolfe and
Hermanson (2004) stated that a personal position or function within the organization can provide the
ability to create or take advantage of the opportunity to commit fraud, especially the position of CEO,
director and heads of other divisions. Wolfe and Hermanson (2004) studied the capability as one of the
factors behind the fraud risk concluded that the switch of director as one proxy that may indicate the
fraud.
Change of director is not always good for the company. Change of director can be a company's
effort to improve the performance of the board of director prior to the change of director or the
recruitment of new director who are considered more competent than the previous director. In other
hand, change of directors could be such a company's effort to kick the directors who know about fraud
occurs in the company. Then, the change of director would require such an adaptation time, so that the
initial performance is not optimum. Directors changes can cause stress period that impacts on the
opportunities to commit fraud. Study of Pardosi (2015) supported Wolfe and Hermanson (2004), which
proved that the capability proxied by change of director has significant effect on the financial statements
fraud.Based on these descriptions, the research hypothesis is formulated as follows :

H7: Change of director has positive effect on influence financial statement fraud in banking sector

3. Research Methods

3.1. Population and Sampling Procedure

The population of this study are all banking companies listed on Indonesia Stock Exchange
during the period 2011-2015. The sampling method for this study uses purposive sampling method, with
the following criteria: (1) The banking companies that already go public or listed on the Indonesia Stock
Exchange (BEI) during 2011-2015, (2) The Company publishes annual financial statements which have
been audited in the company's website or IDX during 2011-2015, (3) The Company is not delisted over
2011-2015, and (4) Data relating to the variables are provided completely (overall data provided in the
publication during 2011-2015).
3.2. Type and Data Source

The data used in this research is secondary data. Secondary data is data obtained in ready-made
form that has been processed and presented by the other party (Supriyanto, 2009). Secondary data used
in this study are external data, where generally prepared by an entity other than the researcher of the
organization concerned (Indriantoro and Supomo, 2002). The external data include the books /journals
of previous research, internet, government publications, financial statement and annual report of banking
sector company in 2011-2015 period that can be accessed through the official website of Indonesia Stock
Exchange and related company websites.

3.3. Operational Definition and Measurement of Variable

Financial Statement Fraud

Financial statement fraud can be measured by discretionary accruals, which calculated by total
accrual minus nondiscretionally accruals. In calculating the DACC, Modified Jones Model is used. The
reason for using the model is because the Modified Jones Model can detect earnings management better
than the other models in line with the results of Dechow et al. (1995), in Ujiyantho and Pramuka (2007).
To measure discretionary accruals, firstly is calculating the total accruals for each firm i in year t with a
modified method of Jones, there are:

TAC it = Niit – CFOit ……………………………....……...................................….......(1)

Where, TAC it = Total accrual, NIIT = Net Income, CFOit = Operating Cash Flow
The total value of accrual (TAC) is estimated by OLS regression equation as follows:
TACit/Ait-1=β1(1/Ait-1)+β2(ΔRevt/Ait-1)+β3(PPEt/Ait-1)+e........................................(2)

By using the above regression coefficients, the value of non-discretionary accruals (NDA) can be
calculated using the formula:
NDAit=β1(1/Ait-1)+β2(ΔRevt/Ait-1-ΔRect/Ait-1)+β3(PPEt/Ait1...................................(3)
Then, discretionary accrual (DA) can be calculated as follows:
DAit = TACit/Ait-NDAit ……………………………..................................…………....(4)

Where,
DAit = Discretionary Accruals firm i in period t
NDAit = Non Discretionary Accruals firm i in period t
Tacit = Total accrual firm i in period t
NIIT = Net profit firm i in period t
CFOit = Cash flow from operating activities firm i in period t
Ait-1 = Total assets of firm i in period t-1
ΔRevt = Changes in the company's revenue in the period to t i
PPET = fixed assets of the company in the period to t
ΔRect = Changes in accounts receivable firm i in period t
e = error

Financial Targets

In carrying out their activities, companies often set the amount the rate of profit to be obtained
on the effort expended to get the profits. This condition is called financial targets. One measurement to
assess the level of profits from the company on effort expended is ROA. Comparative earnings on total
assets (ROA) is a measure of operating performance that is widely used to indicate how efficient the
assets have been working (Skousen et al., 2009). ROA (Return on Assets) is often used in assessing the
performance of the manager and in determining bonuses, wage increases, and others. Therefore, ROA
variable is used as a proxy for financial targets in this study. Return on Assets (ROA) is a part of the
profitability ratios in financial statements analysis or business performance measurement. ROA can be
calculated by the following formula:

Net Income Before Extraordinary Items𝑡

𝑅𝑂𝐴 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑒𝑡𝑡

Financial Stability
Financial stability is a condition that describes the company's financial condition in a stable
condition. Assessment about the stability of companies financial condition can be seen from how the
company states its assets. Total assets describe the property owned by the company. Total assets include
current assets and non current assets . Research conducted by Skousen et al., (2009) proved that the
greater change rate in companies total assets, the greater probability of the perpetration of a fraud on
the financial statements. Financial stability proxied by ACHANGE, ACHANGE is the ratio of assets
changes for two years. ACHANGE is calculated by the formula:

(Total Asett −Total Asett−1 )

𝐴𝐶𝐻𝐴𝑁𝐺𝐸 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑒𝑡𝑡−1

Institutional Ownership
In this term, institutional ownership is a form of interpretation of personal financial need factor
included in SAS No. 99. Part of shares owned by executive boards will influence management policy in
revealing company’s financial performance. The higher shares institutional ownership than individual
ownership forces the management to do more effort, so that they will not lose costumers and investors.
Furthermore, one that they can do is ‘beautify’ the financial statements through manipulation or fraud.
Institutional ownership proxied by OSHIP. OSHIP proxy is the cumulative percentage of ownership in
the company owned by insiders. Shares owned by management is divided by revolve common shares.
OSHIP is used as a proxy in this study.

𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑤𝑛𝑒𝑑 𝑏𝑦 𝑚𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡

𝑂𝑆𝐻𝐼𝑃 = 𝐶𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

External pressure

External Pressure is excessive pressure for management to meet the requirements or

expectations of third parties. External financing needs are associated with cash generated from operating
activities and investing (Skousen et al, 2009). The ratio of free cash flow is calculated by the formula:

(𝑁𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑟𝑜𝑚 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 − 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 − 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒)

𝐹𝑅𝐸𝐸𝐶 =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
Eksternal auditor quality

External auditor quality in this research is a form of monitoring the development of innefective
factors contained in SAS No. 99. Fraud is one of the effects of weak supervision or monitoring, so it
gives opportunity to the agent or manager for misbehaving with earning management (Andayani, 2010).
Fraudulent practices or fraud can be minimized either by good surveillance mechanisms and KAP BIG
4 is considered to have a greater ability to detect and disclose reporting errors in management.A
company audited by BIG4 has bigger opportunity to detect fraud and management will tend to be careful
and avoid committing fraud because BIG 4 has the ability to be more reliable in detecting fraud and
producing more qualified audit results. Therefore, this study proxied opportunity with the quality of
external auditor (BIG) as measured by a dummy variable. When using BIG 4 audit services then the
company is coded 1, otherwise, if the company is not using BIG 4, then, it is coded as 0.

Change in auditor

Rationalization is loaded with subjective assessments of the company. This is the justification
for the action taken. Change in auditor of a company can be assessed as an attempt to remove any fraud
trail which was discovered by the previous auditor. Therefore, this study proxied rationalization by the
turn of the external auditor (AUDCHANGE) as measured by a dummy variable. If there is a change in
public accounting firm during the period 2011-2015 it is coded with 1, otherwise if there is no change
in the public accounting firm during the period 2011-2015 it is coded with 0.

Change of director

Capability of a company will affect the possibility of committing fraud. This research attempts
to interpret capability with change of director. Change of director (DIRCHANGE) is measured by
dummy variable. If there is change of director during the period 2011-2015 it is coded 1, otherwise if
there is no switch during the period 2011-2015 it is coded with 0.

Data Analysis Technique

Classic assumption test conducted to make sure that the regression equation obtained has
accuracy in estimation, unbiased and consistent. Classic assumption test in this study including
normality test, multicollinearity test, autocorrelation test and heteroscedasticity test. In addition, the
hypothesis testing is apply by multiple regression analysis using regression equation as follows:

DAit = β0 + β1ROA+ β2ACHANGE + β3OSHIP + β4FREEC + β5AUDQUAL + β6AUDCHANGE+

β7DIRCHANGE + e

Information:
β0 = Constant
β1,2,3,4,5,6,7 = Regression coefficient of each proxy
DACCit = Discretionary Accruals
ROA = Return on Asset Ratio
ACHANGE = Ratio of Changing in Total Assets
OSHIP = Ration of Internal Shares Ownership
FREEC = Free Cash Flow Ratio
AUDQUAL = External Audit Quality
AUDCHANGE = Change in Auditor
DIRCHANGE = Change of director
e = error

4. Result And Discussion

41. Description of Research Sample

This study took a sample of companies that belong to banking sub sector company that listed in
Indonesia Stock Exchange (BEI) in 2011-2015. Based on observation in official website of Indonesian
exchange (idx.co.id), there are 43 companies belonging to the category of banking sub-sector. Sampling
method using purposive sampling, obtains 30 companies that meet the criteria of the sample. The
number of companies is 30 with 5 years of time period, so the amount of observations in this study is
150.

4.2. Classical Assumption Test

Normality test

The method that used to determine normal or unnormal data used are the kolmogorov smirnov
test. Criteria for normal or unnormal residual data is with analyze the value of asymp sig, if the value
bigger than 0.05, it means the data is normal. The results shows that the value of asymp.sig is bigger
than 0.05 thus it can be concluded that the residual data in this study has been spread normally.

Multicolinearity test

The method used to detect the existing of multicolinearity is by seeing the value of Variance
Inflation Factor (VIF). The criteria for determining the presence or absence of multicolinearity
symptoms are if the value of tolerance is greater than 0.1 and VIF is less than 10 then the model is free
from multicolinearity symptoms. The results shows that tolerance values for each independent variable
is greater than 0.1 and VIF each independent variable is less than 10. Thus, it can be concluded that
there are no symptoms multicolinearity in this research model. In other words, the independent variables
are independent.

Autokorelation test

This research use Durbin Watson test method to determine the presence or absence of
autocorrelation symptomsDetermining the presence or absence of autocorrelation symptoms is by
comparing the value of Durbin Watson with DL and DU value obtained from the Durbin Watson table.
If the value of DW is between the value of DU and 4-DU, then the model is free from autocorrelation.
The results shows that he value of Durbin Watson is between DU and 4-DU (1.8465<1.984<2.1535)
thus it can be stated that there are no autocorrelation symptoms on this research model.

Heteroscedasticity test

This study uses Park method to detect the presence or absence of heteroscedasticity symptoms. In
Park method, the independent variables are regressed towards residual value that has been squared, then
it will be transformed into natural logarithm (ln). The determination criteria whether there is any
heteroscedasticity in the model is by seeing significance value of each independent variable. If the
significance value is greater than 0.05, it can be stated that there are no heteroscedasticity symptoms on
the model. The results shows that the significance value for each independent variable is greater than
0.05 alpha. So, it can be concluded that the model is free from heteroscedasticity symptoms.
4.3. Hypothesis Testing and Discussion

This research used F-test to test the accuracy of the model (goodness of fit). The results shows
that that F value is 122.538 with a significance value is 0.000. Because the significance value less than
alpha 0.05, then it can be concluded that the regression model that formed are fit. In together, inancial
target (ROA), financial stability (Achange), institutional ownership (Oship), external pressure (Freec),
auditor quality, auditor change, dan change of director influence financial statement fraud (Discretionary
Accrual).
 But in the other side, different result showed by t-test. The first hypothesis testing aims to
examine the effect of financial targets as measured by ROA on financial statement fraud. According to
table 4.10, it is known that t value of financial targets is 4.789 with probability value 0.000. By using df
(n-k-1 = 150 -8- 1 = 141) and alpha 5%, it obtains the t table of 1.655. Because the t value is positive
and greater than t table, supported with probability value that less than 0.05, it can be concluded that
partially the financial targets have positive effect on financial statement fraud. This means that the higher
predicted value of financial targets will increase the financial statement fraud. The result is consistent
with research of Carlson and Bathala (1997) in Widyastuti (2009), that research found that companies
which have large profits (measured by ROA) are more likely to do earnings management rather than
companies that have a small profit. Results of Norbarani (2012), Nugraha and Heny (2012) found the
similar results with this study, the financial targets that proxied by Return On Asset has positive
influence on the occurence of financial statement fraud.

The second hypothesis testing aims to examine the effect of financial stability as measured by
changes in the value of total assets (Achange) to financial statement fraud. According to table 4.10 the
t value for financial stability is 27.999 with the probability value of 0.000. By using df (n-k-1 = 150-8-
1 = 141) and alpha 5%, it obtains that the t table is 1.655. Because the t value is positive and greater
than t table then supported with a probability value less than 0.05, it can be concluded that partially the
financial stability has positive effect on financial stability of financial statement fraud. Meant, the
increase of financial stability value is predicted will increase the financial statement fraud. The results
also support the previous research conducted by Skousen et al (2009), Martantya and Daljono (2013),
Sihombing (2014) and Tessa and Harto (2015) which found that financial stability can significantly
affect the financial statements fraud.

The third hypothesis testing aims to examine the influence of institutional ownership (Oship)
on financial statement fraud. According to table 4.10, the t value of institutional ownership is 0.187 with
a probability value of 0.852. By using df (n-k-1 = 150-8-1 = 141) and alpha 5%, it the obtains that the t
table is 1.655. The t value of institutional ownership is in line with the statement on the hypothesis that
is positive, but when compared with the value t table, t value of institutional ownership is smaller than
t table. It can be seen in table 4.10 that the probability of institutional ownership is greater than 0.05 that
is for 0.852, It can be concluded that, partially the institutional ownership does not affect the financial
statement fraud. It also confirmed by the explanation of Chew & Gillan (2009) in Agustia (2013) that
the presence of institutional ownership will not necessarily have an impact on increasing the control
processes that influence the reduction of management fraud. The results of this study support the
previous research conducted by Astari (2015) that institutional ownership has no effect on discretionary
accrual which is a proxy of fraud in this study.

The fourth hypothesis testing aims to examine the influence of external pressure (Freec) on
financial statement fraud. According to table 4.10 the t value of external pressure is -14.425 with
probability value 0.000. By using df (n-k-1 = 150-8-1 = 141) and alpha 5% it obtains that the t table is -
1.655. Probability value of external pressure is less than 0.05, It indicates that the partial pressure of
external variables affect the financial statement fraud. Statistically, Freec has significant impact on the
financial statement fraud, but the t value is negative, So it is different from the statements on the
hypothesis stating that the influence of external pressure towards financial statement fraud is positive;
but in this study is negative. This mean the increase of Freec in the fact can decrease fraud because there
are still a lot of bank that have a negative cash flow. Norbarani (2012) explained that low free cash flow
will reduce the shareholders trust because it indicates that the internal performance is not sufficient to
meet the investment needs of companies, So management may be fraud by increasing free cash flow to
cover the lack of free cash flow. But in the fact, this research finds there are many companies that have
a negative cash flow, so that there is no indication to companies to improve their cash flow. The results
of this study is different from the results of research conducted by Skousen et al. (2009), which proved
that the external pressure by proxy of free cash flow significantly influences financial statement fraud.

The fifth hypothesis testing aims to examine the effect of auditor quality on financial statement
fraud. According to table 4.10 the t value of auditor quality is 2.529 with aprobability value is 0.013. By
using df (n-k-1 = 150-8-1 = 141) and alpha 5% it obtains that the t table is 1.655. Because the t value is
positive and greater than t table, and supported with probability
value that less than 0.05, it can be concluded that in partially the exsternal auditor quality have positive
effect on financial statement fraud. Although the influence of external auditors on financial statement
fraud is statistically significant, the t value of external auditor quality is different from the hypothesis
statements that the influence of the external auditor towards financial fraud is negative. The results of
this study is different from the previous research by Lennox and Pittman (2010) and Smaili, et al., (2009)
which indicated that the external auditors who come from BIG 4 public accounting firm have better
ability to detect fraud rather than non BIG 4 public accounting firm. This is evidenced by the data found
in the result of analysis that from 150 observations, the average value of discretionary acccrual is 0.1024.
Out of the 150 observations there are 123 observations that the iscretionary accruals value is above
0.1024. And from 123 observation indicated, there are 93 companies that audited by BIG 4 accounting
firm.

This research is also supported by Fajri (2008) and Herman (2009). Fajri (2008) examined
companies in Indonesia as a sample and focus on the differences between the quality of the audit from
BIG 4 public accounting firms and non BIG 4 public accounting firms. Fajri found a positive influence
among the BIG 4 with discretionary accruals. This means that the use of the BIG 4 audit services
negatively affects audit quality. Fajri (2008) stated that the probable cause is due to the implementation
control of audit services by the regulator to the BIG 4 which may less stringent, because of market
dependence towards BIG 4. This dependence arises because the competence of BIG 4 is greater than
non BIG 4 accounting firm in terms of their ability to provide qualified audit services to large companies.
In addition, the low competition level that faced by the BIG 4 accounting firm will increasie the
bargaining power of the Big 4 accounting firm.
Hermawan (2009) found the audit quality (measured by the size of the firm, the Big 4 and non-
Big 4) has a negative and significant influence on ERC, meant the earnings information of companies
with high quality audits is responed lower than the company with low audit quality or the firm size
negatively affect the audit quality. Hermawan (2009) connects the research results of Khurana and
Raman (2004) which shows that the higher audit quality by the BIG 4 only happens in United States, It
does not happen in other countries such as Australia, Canada, and United Kingdom. It is caused by the
factors litigation risk towards BIG 4 as an auditor which is mostly higher in the United States rather than
the other countries. Therefore, BIG 4 company has more attention to the audit quality. This indicates
that the BIG 4 may not always provide high quality of audits because risk of litigation faced by the BIG
4 company in Indonesia is relatively small.

The sixth hypothesis testing aims to examine the effect of the change in auditor towards
financial statement fraud. According to the table 4.10 the t value of change in auditor is -0.719 with a
probability value is 0.473. By using df (n-k-1 = 150-8-1 = 141) and alpha 5%, it obtained that the t table
is -1.655. The t value is greater than t table, it can be seen also in table 4.10 that the probability value of
change in auditor is greater than 0.05 that is 0.473. It can be concluded that partially change in auditor
does not affect the financial statement fraud. In addition, the t value that is negative is different from the
hypothesis that state a positive statement. It is because there are many companies in this study which
did not make auditor change in period 2011-2015. Based on the results, it revealed that from 30 banks
surveyed, the number of banks that did not make the change in auditor is more than 16 companies.
Meanwhile the companies that make change in auditor are 14 companies. The results of this study is
different from Kurniawati (2012) that the client can use the mechanisms of auditor change to reduce the
detection of fraud by the company's financial statements.

The seventh hypothesis testing aims to examine the influence of change of director on financial
statement fraud. According to the table 4.10 the t value of change of director is -0.213 with a probability
value of 0.831. By using df (n-k-1 = 150-8-1 = 141) and alpha 5%, it obtains that the t table is 1.655.
Because the t value of change of director is smaller than t table and the probability value of change of
directoris is greater than 0.05 that is 0.831, it can be concluded that partially the change of director does
not affect the financial statement fraud. It because based on the observed data from 150 observations
during period 2011-2015, only 37 observations that practice change of director in their company. The
results of this study differ from what was found by Wolfe and Hermanson (2004), which also examined
the capability as one of the factors behind the fraud and decided that change of director may indicate
fraud. But in this study change of director has not been proven to here influence the existing of fraud
committed by banks.

Meanwhile, the obtained R Square value is 0.851. It can be interpreted that the variation of
financial targets (ROA), financial stability (Achange), institutional ownership (Oship), external pressure
(Freec), auditor quality , auditor change, and change of director variable is able to explain the variation
of the financial statement fraud variable (Discretionary Accrual) for about 85.1%. Meanwhile 14.9%
are influenced by other variables that are not included in this research.

5. Conclusion, Implication And Limitation

5.1. Conclusion

Result of this study shows that financial target (ROA), financial stability (Achange), and eksternal
auditor quality has positive influence on the occurence of financial statement fraud. External pressure
(Freec) has negative influence on the occurence financial statement fraud. While Institutional ownership
(Oship), external auditor change, dan change of director has ninfluence on the occurence financial
statement fraud.

5.2. Implication
There are several implications for the investors, for the development of accounting and other
parties. The potential investors are expected to be able to understand the variables that influence the
occurrence of financial statement fraud, so it can be used as an early detection to find out fraud on the
company financial statement and can take appropriate decisions. For the development of accounting
knowledge, it can provide insight about the factors that affect financial statement fraud, to explain the
concepts and elements of fraud diamond to detect financial statement fraud, and showing the variables
that can affect the financial statement fraud.

5.3. Limitation
This research has several limitations which could bring a betterment for the further research. First,
the calculation of discretionary accrual in this study uses the same coefficient for all companies. So for
future research, it is advisable to use the coefficients for each company. So, it can capture the different
characteristics of each company and the normal accrual can be more accurate.
Second, related to the study of financial statement fraud, further research is recommended to use
qualitative methods in research methodology or using a combination of qualitative and quantitative
methods. Because there are many elements of fraud that difficult to measure with quantitative methods,
such as elements of rationalization and capability.

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Appendix

Classical Assumption Test

Normality Test

One-Sample Kolmogorov-Smirnov Test

Unstandardized
Residual
N 150
Mean 0E-7
Normal Parametersa,b
Std. Deviation .05233897
Absolute .087
Most Extreme Differences Positive .085
Negative -.087
Kolmogorov-Smirnov Z 1.068
Asymp. Sig. (2-tailed) .204
a. Test distribution is Normal.
b. Calculated from data.

Multicolinearity Test
Coefficientsa
Model Collinearity Statistics
Tolerance VIF
ROA .756 1.323
ACHANGE .842 1.188
OSHIP .887 1.128
1 FREEC .826 1.211
AUDITOR_QUALITY .849 1.178
AUDITOR_CHANGE .967 1.034
DIRECTION_CHANGE .920 1.087
a. Dependent Variable: DISCRETIONARY_ACCRUAL

Autocorrelation Test

Model Summaryb
Model R R Square Adjusted R Std. Error of the Durbin-Watson
Square Estimate
a
1 .926 .858 .851 .0536135 1.984
a. Predictors: (Constant), DIRECTION_CHANGE, AUDITOR_QUALITY,
AUDITOR_CHANGE, FREEC, OSHIP, ACHANGE, ROA
b. Dependent Variable: DISCRETIONARY_ACCRUAL
Heteroscedasticity Test

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
(Constant) -7.236 .823 -8.795 .000
ROA -20.525 15.470 -.124 -1.327 .187
ACHANGE 2.074 1.082 .170 1.917 .057
OSHIP -.324 .892 -.031 -.363 .717
1
FREEC -4.540 4.389 -.092 -1.034 .303
AUDITOR_QUALITY -.574 .527 -.096 -1.089 .278
AUDITOR_CHANGE -.163 .456 -.029 -.357 .722
DIRECTION_CHANGE .201 .542 .031 .371 .711
a. Dependent Variable: Ln_Res2

Multilinear Regression Analysis

Model Summary
Mode R R Square Adjusted R Std. Error of
l Square the Estimate
1 .926a .858 .851 .0536135
a. Predictors: (Constant), DIRECTION_CHANGE,
AUDITOR_QUALITY, AUDITOR_CHANGE, FREEC,
OSHIP, ACHANGE, ROA

ANOVAa
Model Sum of df Mean F Sig.
Squares Square
Regression 2.466 7 .352 122.538 .000b
1 Residual .408 142 .003
Total 2.874 149
a. Dependent Variable: DISCRETIONARY_ACCRUAL
b. Predictors: (Constant), DIRECTION_CHANGE, AUDITOR_QUALITY,
AUDITOR_CHANGE, FREEC, OSHIP, ACHANGE, ROA