Financial Crime World

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STUDY: Financial Targets Do Not Affect Fraudulent Financial Reporting in Indonesian Banks

A recent study on the relationship between financial targets and fraudulent financial reporting in Indonesian banks has yielded surprising results.

Methodology

The research analyzed data from 43 banking companies listed on the Indonesia Stock Exchange (IDX) from 2017 to 2021. The study used a logistic regression model to analyze the data and found that the coefficient of determination (Nagelkerke’s R-square) was 0.498, indicating that the independent variables explained only 49.8% of the dependent variable. The results also showed that the Hosmer and Lemeshow goodness of fit test obtained a significance value of 0.894, indicating that there is no significant difference between the model and the data.

Findings

The study’s findings suggest that financial targets, as proxied by return on assets (ROA), do not affect fraudulent financial reporting. The results also show that ROA does not support the fraud hexagon theory, which states that financial stability is a stimulus element influencing fraud.

  • Some banks with high ROA values did not commit fraudulent financial reporting.
  • Others with low ROA values did.
  • For example:
    • Bank Rakyat Indonesia Argoniaga Tbk., which had the highest ROA value of 14.75, was classified as having a low risk of fraudulent financial reporting.
    • Bank Jago Tbk., which had the lowest ROA value of -15.89, was classified as having a high risk.

Implications

The study’s lead author noted that these findings suggest that management does not react negatively to financial targets and that an increase in ROA does not always indicate fraudulent financial reporting. Instead, it may be due to an increase in the quality of operations and the recruitment of qualified employees.

Conclusion

Overall, the study’s results have important implications for policymakers, regulators, and investors seeking to understand the factors driving fraudulent financial reporting in Indonesian banks.

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