Citation:

Andrian Budi Prasetyo, Aditya Septiani, Adi Firman Ramadhan, Alka Kirani Fauziah. "Financial Ratio Analysis as a Tool for Fraud Detection: A Study of Non-Financial Firms in Indonesia" International Research Journal of Economics and Management Studies, Vol. 2, No. 2, pp. 310-315, 2023.

Abstract:

This study's main goal is to investigate how financial ratios can help identify fraud in business financial reporting. Leverage, profitability, asset composition, liquidity, and capital turnover are among the ratios that are examined in the study. Using a quantitative method, annual reports of firms listed on the Indonesia Stock Exchange (BEI) and secondary data from the Financial Services Authority's (OJK) list of sanctioned cases were used. The population of the study consisted of BEI-listed companies, and a sample of non-financial companies with available data was chosen via purposive sampling. Based on industry and asset size, fraudulent and non-fraudulent businesses were linked. Due to the existence of a dummy dependent variable and a mixture of metric and non-metric independent variables, logistic regression analysis was used. The results show that the capital turnover ratio has a negative impact on financial reporting fraud whereas the leverage ratio has a positive impact. Profitability, asset composition, liquidity ratios, and financial reporting fraud, however, did not appear to be significantly correlated. This study has practical ramifications for accountants, academics, auditors, and fraud investigators, and it offers useful information to investors in their decision-making. Moreover, it offers guidance to management in mitigating fraud and misconduct within their organizations. Nevertheless, the study is subject to limitations concerning sample size and data availability from the BEI. The manual data collection process may have constrained access to additional pertinent information, and the limited availability of information on violations restricted the number of fraudulent company samples.

References:

[1] Amara, I., Ben Amar, A. and Jarboui, A. (2013) ‘Detection of Fraud in Financial Statements: French Companies as a Case Study’, International Journal of Academic Research in Accounting Finance and Management Sciences, 3(3), pp. 40–51. doi: 10.6007/IJARAFMS/v3-i3/34.
[2] Dalnial, H. et al. (2014) ‘Detecting Fraudulent Financial Reporting through Financial Statement Analysis’, Journal of Advanced Management Science, 2(1), pp. 17–22. doi: 10.12720/joams.2.1.17-22.
[3] Dechow, P. M., Sloan, R. G. and Sweeney, A. P. (1996) ‘Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC’, Contemporary Accounting Research, 13(1), pp. 1–36. doi: http://dx.doi.org/10.1111/j.1911-3846.1996.tb00489.x.
[4] Devale, A. B. and Kulkarni, R. V. (2012) ‘Applications of Data Mining Techniques in Life Insurance’, International Journal of Data Mining & Knowledge Management Process (IJDKP), 2(4), pp. 31–40. doi: 10.5121/ijdkp.2012.2404.
[5] Fung, A. (2015) ‘Putting the Public Back into Governance: The Challenges of Citizen Participation and Its Future’, Public Administration Review, 75(4), pp. 513–522.
[6] Hill, C. W. L. and Jones, T. M. (1992) ‘Stakeholder-Agency Theory’, Journal of Management Studies, 29(2), pp. 131–154.
[7] Jensen, M. C. and Meckling, W. H. (1976) ‘Theory of the firm: Managerial behavior, agency costs and ownership structure’, Journal of Financial Economics, 3(4), pp. 305–360. doi: 10.1016/0304-405X(76)90026-X.
[8] Kanapickienė, R. and Grundienė, Ž. (2015) ‘The Model of Fraud Detection in Financial Statements by Means of Financial Ratios’, Procedia - Social and Behavioral Sciences, 213, pp. 321–327. doi: 10.1016/j.sbspro.2015.11.545.
[9] Kassem, R. and Higson, A. (2012) ‘The New Fraud Triangle Model’, Journal of Emerging Trends in Economics and Management Sciences (JETEMS), 3(3), pp. 191–195.
[10] Khajavi, S. and Ebrahimi, M. (2018) ‘Investigating the Impact of Corporate Governance Mechanisms on Financial Statements Fraud of the Listed Companies in Tehran Stock Exchange’, Journal of Asset Management and Financing, 12.
[11] Listyawati, I. (2016) ‘Analisis Faktor yang Mempengaruhi Financial Statement Fraud’, in Prosiding Seminar Nasional Multi Disiplin Ilmu & Call For Papers Unisbank (SENDI_U) Ke-2 Tahun 2016. Semarang: Unisbank Semarang, pp. 659–665.
[12] Modugu, P. K. (2012) ‘Determinants of Audit Delay in Nigerian Companies: Empirical Evidence’, 3(6), pp. 46–55.
[13] Mohamed, N. and Handley-Schachler, M. (2015) ‘Roots of Responsibilities to Financial Statement Fraud Control’, Procedia Economics and Finance. Elsevier B.V., 28(December), pp. 46–52. doi: 10.1016/s2212-5671(15)01080-1.
[14] Omoye, A. S. and Eragbhe, E. (2014) ‘Accounting Ratios and False Financial Statements Detection: Evidence from Nigerian Quoted Companies’, International Journal of Business and Social Science, 5(7), pp. 206–215.
[15] Persons, O. S. (1995) ‘Using Financial Statement Data to Identify Factors Associated with Fraudulent Financial Reporting’, Journal of Applied Business Research, 11(3), pp. 38–46.
[16] Segal, S. Y. (2016) ‘Accounting frauds – review of advanced technologies to detect and prevent frauds’, Economics and Business Review, 2 (16)(4), pp. 45–64. doi: 10.18559/ebr.2016.4.3.
[17] Somayyeh, H. N. (2015) ‘Financial ratios between fraudulent and non-fraudulent firms: Evidence from Tehran Stock Exchange’, Journal of Accounting and Taxation, 7(3), pp. 38–44. doi: 10.5897/jat2014.0166.
[18] Spathis, C. T. (2002) ‘Detecting False Financial Statements Using Published Data: Some Evidence from Greece’, Managerial Auditing Journal, 17(4), pp. 179–191. doi: 10.1108/02686900210424321.
[19] Udeh, S. N. and Ugwu, J. I. (2018) ‘Fraud in Nigerian Banking Sector’, International Journal of Academic Research in Business and Social Sciences, 8(5), pp. 585–603. doi: 10.6007/ijarbss/v8-i5/4159.
[20] Wang, Z. et al. (2017) ‘Managerial ability, political connections, and fraudulent financial reporting in China’, Journal of Accounting and Public Policy. Elsevier Inc., 36(2), pp. 141–162. doi: 10.1016/j.jaccpubpol.2017.02.004.
[21] Widyanti, T. and Nuryatno, M. (2018) ‘Analisis Rasio Keuangan Sebagai Deteksi Kecurangan Laporan Laporan Keuangan Perusahaan Barang Konsumsi yang Terdaftar di Bursa Efek Indonesia’, Assets: Jurnal Akuntansi dan Pendidikan, 7(1), pp. 72–80. Available at: http://ejournal.unipma.ac.id/index.php/assets/article/view/2360.
[22] Zainudin, E. F. and Hashim, H. A. (2016) ‘Detecting fraudulent financial reporting using financial ratio’, Journal of Financial Reporting and Accounting, 14(2), pp. 266–278. doi: 10.1108/JFRA-05-2015-0053.

Keywords:

Asset Composition Ratio, Capital Turnover Ratio, Financial Ratio, Fraud Detection, Leverage Ratio.