Detection of Financial Statement Fraud Using Fraud Hexagon Theory

Abstract

This study examines indications of financial statement fraud in Indonesian banking companies using the fraud hexagon framework. The framework comprises pressure, capability, collusion, opportunity, rationalization, and ego, operationalized through financial targets, financial stability, external pressure, chief executive officer education, political connections, ineffective monitoring, the nature of the industry, total accruals, and the frequency of chief executive officer photographs. A quantitative approach was applied to banking companies listed on the Indonesia Stock Exchange during 2019–2022. Purposive sampling identified 39 companies, providing 156 initial company-year observations; 50 observations were excluded as outliers, leaving 106 for analysis. Multiple linear regression was used, supported by descriptive analysis and classical assumption tests. The results indicate that pressure, when represented by financial targets and external pressure, is significantly associated with the detection of financial statement fraud. Financial stability and the proxies for capability, collusion, opportunity, rationalization, and ego show no statistically significant individual effects. The adjusted R-squared is 0.017, indicating limited explanatory power. These findings suggest that the selected fraud hexagon proxies provide only a partial account of financial-reporting fraud indicators in the sampled banks. The study recommends more complete annual-report data, additional proxies such as financial need, and alternative fraud-theory frameworks in future research. Limitations include data availability, the exclusion of outliers, and the substantial variation unexplained by the model.