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Archives of Business Research – Vol. 9, No. 10

Publication Date: October 25, 2021

DOI:10.14738/abr.910.10813. Irawan, H., & Aryati, T. (2021). The Moderating of Pollitical Connection on Factors Affecting Fraudulent Financial Statement from

the Pentagon Fraud Model Perspective. Archives of Business Research, 9(10). 64-78.

Services for Science and Education – United Kingdom

The Moderating of Pollitical Connection on Factors Affecting

Fraudulent Financial Statement from the Pentagon Fraud Model

Perspective

Helmiansyah Irawan

Faculty Economics and Business, Trisakti University, Jakarta, Indonesia

Titik Aryati

Faculty Economics and Business, Trisakti University, Jakarta, Indonesia

ABSTRACT

The Purpose of this research is to analyze the effect of the factors that effect of fraud

in financial statements that occur in companies. And also analyzes the impact of

political connections as a moderating variable that strengthens or weakens the

factors that influences fraud in the financial statements.The author collects

empirical study data from manufacture industry companies, using secondary data

taken from annual reporting of companies listed in the Indonesia Stock Exchange

and analyzes them using the SPSS program. A total of 60 units of data analysis that

meet the criteria and can be used as sample in the research. This research reveals

that effective monitoring and change of director has a positive and significant effect

on financial statement of fraudulent. A set of financial targets, changes of auditors,

and the frequencies of CEO pictures have not effect on fraudulent of financial

statement. Whatever, the impact on political connection as oderating variable only

strengthens the influence between effective monitoring and change of BOD on

fraudulent financial statement from before being moderated by the political

connection. This study only takes data of secondary from the annual reporting of

companies and financial reports of firm from BEI, especially the manufacturing

industry which only covers three sectors. Meanwhile, the Indonesia Stock Exchange

consists of nine existing industrial sectors. Originality/value for this research is

Political Connection as a moderator between financial stability, in effectively

monitoring, change of auditor, change of director and frequencies of number

commissioner’s pictures on financial statement of fraudulent in the context of

manufacture companies listed in BEI is still little researched. So this research will

not only fill in the current gaps in the literature but also spark new academic

debates, but this study will also contribute to the practice of fraudulent financial.

Keywords: financial stability, ineffectively monitoring, changes of auditor, changes of

director, financial statement of fraudulent

INTRODUCTION

Financial reports are a form of corporate responsibility to stakeholders, including eksternal and

internal parties to inform the firm;s financial performance for a certain period (Ratnasari and

Solikhah, 2019). Financial statement reflection from management accountability and efficiency

in managing the financial resources and expenditures.\This condition encourages management

to do everything they can when the company's goals are not achieved, one of which is

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Irawan, H., & Aryati, T. (2021). The Moderating of Pollitical Connection on Factors Affecting Fraudulent Financial Statement from the Pentagon Fraud

Model Perspective. Archives of Business Research, 9(10). 64-78.

URL: http://dx.doi.org/10.14738/abr.910.10813

manipulating the financial statements. Therefore, financial statements are very important for

companies and entities as well as various stakeholders who can affect the running of a company.

From various cases of accounting scandals in financial statements where misstatements or

frauds occurred in the financial report.

A Financial Report also show the result in the management accountability for the use of the

resources entrusted to them. Action of manipulating financial statement was a form of

fraudulent act or fraud financial statement fraud defined by the Australian Auditing Standard

(AUS) is an intention negligence include presenting amounts in financial reporting to deceived

users of financial statements. So the role of the auditor profession must be more effective so

that fraud can be detected as early as possible before it develops into a scandal.

The ACFE in its report to the nation on occupational fraud and and abused (ACFE, 2016) found

approximately 77% of fraudulent committed such as finance and accounting,

operationalization, sales, upper-level management (executive), customer service (CS), and

purchasing. In addition, there was an increase in most types of fraud that caused losses in

Indonesia, one of which was fraud in financial statements by 4.0%. This figure is not too large

when compared to corruption which reached 77.0%, but fraudulent financial statements have

the greatest impact on a company or other stakeholders.

Indonesia is the largest economic of transactional, and is playing an increasingly important role

in economic global. However, due to high levels of corruption of political and weakness law

enforcement in Indonesia. In the study, we explore two of important determinant of Fraudulent

of Financial Reporting in Indonesia, such us: ability of managerial and political connections.

Another variable available for discussed in this research is connection of political, where the

presences of political connection will weakness of the effectiveness of managerial ability about

to possibility reduce the fraudulent of financial reporting. The Fraudulent standard in

Indonesia, which is the characteristic by based economic (Du et al., 2012), the firm of listed to

resolved asymmetry of information by way of connection and like that has a low financial of

report. In the quality of financial statements decreased by the variant from politic of connection.

LITERATURE REVIEW

Fraudulent Theory

ACFE-Association of Certified Fraud Examiner divides fraud for three types: (1) Asset

Misappropriate. This type includes of theft in companies or the other party assets or assets.

This is the easiest from of fraud to detect, because it is real or quantifiable; (2) Fraud of Financial

Report. Covers action taken by officers or executives of a company and government agent to

back up in the actual financial condition with by doing financial technical on presenting

financial statements to get a profit; (3) Corruption.

Many actions often occur in development countries where law enforcement is still weak and

there is still a lack of awareness of Good Corporagte Governance so that the integrity factor is

still questionable. This type of.fraud can often not be detected because the parties who work

together enjoy the benefits.Includes of the abuse power or conflicts of interest, bribery, illegal

gratuities and economic ectortion.

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Archives of Business Research (ABR) Vol. 9, Issue 10, October-2021

Services for Science and Education – United Kingdom

Pentagon fraudulent

Pentagon of fraudulent is an extension of the fraud triangle and the diamond fraud theory.

Pentagon fraud to dig deeper into the factor that trigger fraud is the fraudulent of pentagon

theory (crowe’s pentagon fraudulent of theory). The following theory was put forward by

Pratiwi, N. R et al. (2018). The theory of fraudulent is an extension of the triangle of fraud theor

previously proposed by Cressey and the fraudulent of diamond by Wolfe and Hermason in

2014, in this theory adding two other elements of fraudulent, such us: diamond model fraud

and arrogance.

Financial Stability (FS)

FS is a condition that forces a firm to describe the company's financial condition as stable. For

example: a company may manipulate profits when its FS or profitabilities is threatened by the

current economy conditions in a country. According to Utama (2018) the impact of financial

stability on FFR has a positive effect. This means that the increase in company stability through

the growth of its assets also increases the indications of the possibility in fraudulent to cover

up the company's true financial condition.

Effective Monitoring (EM)

EM is a company condition where the companies have a supervisory units that effectively

monitors from the company’s performance. For example: there is management dominance by

small group or one by one person, there must be contr5ol of compensation, in effective

supervision of director of board and committee of audit on the reporting of financial process

and internal control.

Political Connection

Political connection is a condition in which a relationship is established between certain parties

and parties who have political interests which are used to achieve certain things that can benefit

both parties (Purwanti & Sugiyarti, 2017). Companies with political connections are companies

that have a special relationship with the government (Pranoto & Widagdo, 2016). A special

relationship with the government can be interpreted as a government-owned company, either

in the form of a BUMN or BUMD. The special relationship between company owners and the

government, of course, is that the company owner is a prominent political figure who is a

member of the board bothin central & local government or as a member of a political party

(Gomez, 2009) in (Pranoto & Widagdo, 2016).

Pressure is measured based on the financial target against the fraudulent financial

statement

Agents and principals have different interests in order to get a bonus for their performance in

order to fulfill the principal's expectation, namely getting high profits. According to Ratnasari

and Solikhah (2019), ROA is a measurement to operate the performance that is widely used to

slow what a efficiency of assets have been used by companies and is used to assesses

managerial performance to determine bonuses and increasing to salary. The higher the target

for management to do everything possible.

The higher the ROA achieved by the company, will further increase the level of disclosure made

by the company towards fraudulent financial reporting (Ratnasari and Solikhah, 2019).

H1: The Financial Target has a significant effect on Financial Reporting of Fraud.