Financial Crime World

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Company Dissatisfaction with Auditors Linked to Higher Risk of Fraud

A new study has found that when companies become dissatisfied with their auditors, the risk of fraudulent financial reporting increases.

The Study

The research, conducted by a team of academics, analyzed data from 26 financial sector companies listed on the Indonesia Stock Exchange between 2016 and 2018. The study used multiple linear regression models to examine the relationship between various factors and fraudulent financial reporting.

Significant Predictors of Fraudulent Financial Statements

The researchers found that changes in directors and frequent CEO photographs in company reports were significant predictors of fraudulent financial statements. Specifically, they found that:

  • Changes in auditors increased the risk of fraudulent financial reporting
  • Changes in directors caused stress periods that resulted in opportunities for fraud
  • Frequent CEO photographs indicated a level of arrogance and superiority that may contribute to fraudulent behavior

Implications for Companies and Regulators

The study’s findings have significant implications for companies and regulators seeking to prevent fraudulent financial reporting.

Recommendations

To reduce the risk of fraud, companies should:

  • Ensure that their auditors are independent and able to detect and prevent fraudulent behavior
  • Implement robust internal controls and monitoring mechanisms to detect and prevent fraudulent financial reporting

Conclusion

The study highlights the importance of effective governance and oversight in preventing fraudulent financial reporting. By prioritizing effective governance and oversight, companies can reduce the risk of fraud and maintain the trust of investors and stakeholders.

Methodology

  • The study analyzed data from 26 financial sector companies listed on the Indonesia Stock Exchange between 2016 and 2018
  • Multiple linear regression models were used to examine the relationship between various factors and fraudulent financial reporting
  • The dependent variable was the fraudulent financial statement, which was detected using a fraud score model

Variables Examined

The study examined several variables that may be associated with fraudulent financial reporting, including:

  • Auditor change: Changes in auditors
  • Director change: Changes in directors
  • CEO photograph frequency: Frequent CEO photographs