Does corporate governance and political connections influence the potential for financial statement fraud?

Ari Singgar Cahyani; Johan Arifin

doi:10.20885/jaai.vol28.iss2.art9

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Abstract

The aim of this research is to analyze the influence of corporate governance and political connections on the potential for financial statement fraud in extractive industry companies listed on the IDX for the 2018-2023 period. The sampling was performed using the purposive sampling method. A logistic regression analysis was performed. The results of this research indicate that corporate governance proxied by the frequency of audit committee meetings, managerial ownership, and related party transactions has a positive effect on the potential for financial statement fraud, while the size of the board of directors has no effect. Political connections proxied by government ownership and politically connected boards negatively affect the potential for financial statement fraud. The addition of control variables, namely firm growth, has a positive effect on the potential for financial statement fraud, whereas firm size has no effect.

Keywords

Financial Statement Fraud Corporate Governance political connections

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Beneish, M. D. (1999). The detection of earnings manipulation. Financial Analysts Journal, 55(5), 24–36. https://doi.org/10.2469/faj.v55.n5.2296

Bertrand, M., Kramarz, F., Schoar, A., & Thesmar, D. (2018). The cost of political connections. Review of Finance, 22(3), 849–876. https://doi.org/10.1093/rof/rfy008

Boso, N., Danso, A., Leonidou, C., Uddin, M., Adeola, O., & Hultman, M. (2017). Does financial resource slack drive sustainability expenditure in developing economy small and medium-sized enterprises? Journal of Business Research, 80(6), 247–256. https://doi.org/10.1016/j.jbusres.2017.06.016

Brogi, M., Gallucci, C., & Santulli, R. (2021). Does one size fit all? A configurational approach to board effectiveness in limiting the excess cash. Management Decision, 59(13), 136–163. https://doi.org/10.1108/MD-08-2020-0999

Brugués, F., Brugués, J., & Giambra, S. (2024). Political connections and misallocation of procurement contracts: Evidence from Ecuador. Journal of Development Economics, 170(April), 1–34. https://doi.org/10.1016/j.jdeveco.2024.103296

Craja, P., Kim, A., & Lessmann, S. (2020). Deep learning for detecting financial statement fraud. Decision Support Systems, 139(10), 1–16. https://doi.org/10.1016/j.dss.2020.113421

Dahlan, M., & Andesto, R. (2022). The characteristic influence of the board of commissioners, on financial reporting fraud and its implications on the value of the company. Journal of Economics, Finance and Accounting Studies, 4(1), 495–504. https://doi.org/10.32996/jefas.2022.4.1.37

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Dewi, K., & Anisykurlillah, I. (2021). Analysis of the effect of fraud pentagon factors on fraudulent financial statement with audit committee as moderating variable. Accounting Analysis Journal, 10(1), 39–46. https://doi.org/10.15294/aaj.v10i1.44520

Diah, E., Arum, P., Wijaya, R., Wahyudi, I., & Brilliant, A. B. (2023). Corporate governance and financial statement fraud during the COVID-19 : Study of Companies under Special Monitoring in Indonesia. Journal of Risk and Financial Management, 16(7), 318. https://doi.org/https://doi.org/10.3390/jrfm16070318

Dose, & Klimoski. (1995). Doing the right thing in the workplace: Responsibility in the face of accountability. Employee Responsibilities and Rights Journal, 8(1), 35–56. https://link.springer.com/article/10.1007/bf02621254

El-Helaly, M. (2018). Related-party transactions: a review of the regulation, governance and auditing literature. Managerial Auditing Journal, 33(8–9), 779–806. https://doi.org/10.1108/MAJ-07-2017-1602

Faccio, M., Masulis, R. W., & Mcconnell, J. J. (2006). Political connections and corporate bailouts. Journal of Finance, 61(6), 2597–2635. https://doi.org/10.1111/j.1540-6261.2006.01000.x

Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The Journal of Law & Economics, 26(2), 301–325.

Girau, E., Bujang, I., & Jidwin, A. (2022). Corporate governance challenges and opportunities in mitigating corporate fraud in Malaysia. Journal of Financial Crime, 29(2), 620–638. https://doi.org/10.1108/JFC-02-2021-0045

Habib, A., Muhammadi, A. H., & Jiang, H. (2017). Political connections and related party transactions: Evidence from Indonesia. International Journal of Accounting, 52(1), 45–63. https://doi.org/10.1016/j.intacc.2017.01.004

Hope, O., & Lu, H. R. (2019). Economic consequences of corporate governance disclosure : Evidence from the 2006 SEC Regulation on Related-Party Transactions. The Accounting Review, 95(4), 263–290. https://doi.org/https://doi.org/10.2308/accr-52608

Ismail Khan, N., & Muhammad Hapiz, A. A. (2022). Financial statement fraud: Evidence from Malaysian public listed companies. Jurnal Intelek, 17(1), 181. https://doi.org/10.24191/ji.v17i1.15937

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X

Kabwe, M. (2023). Fraudulent financial reporting and related party transactions. International Journal of Research in Business and Social Science, 12(2), 217–228. https://doi.org/10.20525/ijrbs.v12i2.2365

Kaituko, L. E., Githaiga, P. N., & Chelogoi, S. K. (2023). Board structure and the likelihood of financial statement fraud. Does audit fee matter? Evidence from manufacturing firms in the East Africa community. Cogent Business and Management, 10(2). https://doi.org/10.1080/23311975.2023.2218175

Kholid, A. W. N., Utami, E. R., & Kresnawati, E. (2023). Political connections and executive remuneration in Indonesia: Does the Role of Institutional Ownership Matters? Accounting Analysis Journal, 11(2), 75–84. https://doi.org/10.15294/aaj.v11i2.59862

Kurnia, Z., Arum, E. D. P., & Wijaya Z., R. (2024). The influence of corporate governance on financial report fraud with company size as a moderating variable in infrastructure, utilities, and transportation companies listed on the indonesian stock exchange during the period 2019-2021. Cashflow Current Advanced Research on Sharia Finance and Economic Worldwide, 3(2), 276–290. https://doi.org/10.55047/cashflow.v3i2.962

Kusuma, H., & Fitriani, N. (2020). Ownership structure and the likelihood of financial reporting fraud. International Journal of Innovation, Creativity and Change, 13(1), 121–140.

Liang, Q., Wang, Z., Guan, X., & Qin, W. (2023). Party direct control and corporate fraud: Evidence from China. Quarterly Review of Economics and Finance, 92(10), 274–290. https://doi.org/10.1016/j.qref.2023.10.008

Maccarthy, J. (2017). Using Altman Z-score and Beneish M-score Models to Detect Financial Fraud and Corporate Failure: A Case Study of Enron Corporation. International Journal of Finance and Accounting, 6(6), 159–166. https://doi.org/10.5923/j.ijfa.20170606.01

Maulidi, A., Shonhadji, N., Fachruzzaman, Sari, R. P., Nuswantara, D. A., & Widuri, R. (2023). Are female CFOs more ethical to the occurrences of financial reporting fraud? Theoretical and empirical evidence from cross-listed firms in the US. Journal of Financial Crime, 30(5), 1342–1366. https://doi.org/10.1108/JFC-07-2022-0170

McLaughlin, C., Armstrong, S., Moustafa, M. W., & Elamer, A. A. (2021). Audit committee diversity and corporate scandals: evidence from the UK. International Journal of Accounting and Information Management, 29(5), 734–763. https://doi.org/10.1108/IJAIM-01-2021-0024

Monks, R. A. G., & Minow, N. (2011). Corporate governance. In Corporate and Business Strategy Review (Vol. 2, Issue 2).

Mukhibad, H., Jayanto, P. Y., & Anisykurlillah, I. (2021). Islamic corporate governance and financial statements fraud: A study of islamic banks. Journal of Governance and Regulation, 10(2), 361–368. https://doi.org/10.22495/JGRV10I2SIART16

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Does corporate governance and political connections influence the potential for financial statement fraud?

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