Association between fraudulent financial reporting, readability of annual reports, and abusive earnings management: A case of Indonesia

Abstract

In practice, auditors sometimes have a hard time detecting false financial statements since they only look at the figures on the financial statements. Consequently, they ignore the red flags in the annual reports’ wording. This study aims to analyze how the level of readability of annual reports and abusive earnings management affects fraudulent financial reporting. A total of 240 annual reports from publicly traded industrial businesses were used. The paper used data from the Indonesia Stock Exchange (IDX) and each sampled companies’ official website. A multiple linear regression analysis was used to test the hypotheses. Falsified financial statements are the dependent variable, while annual report readability and abusive earnings management are independent variables. The Dechow F-Score is used to assess whether financial statements are false. The annual report’s readability is assessed using the Flesch Reading Ease, Length, Flesch-Kincaid, and Lasbarhets Indexes. Finally, accrual discretionary and real earnings management are used to uncover earnings management misuse. According to the findings, dishonest earnings management has a significant influence on financial statement fraud. Moreover, abusive earnings management can aid in the detection of falsified financial statements. AcknowledgmentsRector Universitas Trunojoyo Madura supported this paper under Grant Number 2285/UN46.3.1/PN/2019. Any and all views, results, conclusions, or recommendations stated in this material are solely those of the author(s) and do not necessarily reflect those of Universitas Trunojoyo Madura. The authors would like to express their gratitude to the Rector of Universitas Trunojoyo Madura for his efforts and cooperation in conducting this investigation.

How difficult are the Financial Statements to read?

“…It means that the better the financial performance reflected by the ROA, the easier it is to read. This result is not in line with the research of Xu et al (2020), andTarjo et al (2022), where ROA has a significant negative effect which indicates that in companies with good performance (high ROA), their financial statements tend to be easier to read. Thus, this study not supported Ha1.…”

“…This study is not in line with Gu et al (2020), which shows a positive relationship between ROA and Annual Report Readability, which means that the hypothesis does not support the statement that ROA affects Annual Report Readability. Meanwhile, Tarjo et al (2022) tested the effect of ROA on Annual Report Readability, where there was no significant effect on the two variables.…”

Pengaruh Fraud Pentagon terhadap Fraudulent Financial Reporting Menggunakan Beneish Model

“…Laporan keuangan pada perusahaan dijadikan sebagai alat ukur oleh pemegang saham, investor ataupun kreditur bank untuk mengambil keputusan (Eryigit, 2019;Mattei, 2023;Ngah, 2021;Sun, 2019;Svabova, 2020;Zhang, 2022;Zin, 2020). Faktor yang dapat mempengaruhi kecurangan pelaporan keuangan adalah salah satunya adanya tekanan (Demetriades, 2022;Rostami, 2022;Sallal, 2021;Shakouri, 2021;Tarjo, 2022). Tekanan merupakan situasi dimana manajemen atau pegawai lainnya merasakan insentif atau tekanan untuk melakukan kecurangan.…”

Manipulasi Laba Di Sektor Kesehatan: Studi Sebelum, Saat, Dan Sesudah Pandemi Covid-19 Di Indonesia

“…Secara sederhana, teknik financial shenanigans hanya menggunakan rasio keuangan pada umumnya, seperti rasio kualitas laba dan rasio kualitas pendapatan (Goel, 2013;Grove & Basilico, 2011;Sakti, Tarjo, Prasetyono, & Riskiyadi, 2020). Namun, beberapa peneliti juga menggunakan accrual earnings management (AEM) (Aqabna, Aga, & Jabari, 2023), real earnings management (REM) (Tarjo, Anggono, Prasetyono, Yuliana, & Sakti, 2022), Beneish M-Score Model (Hasan, Omar, Barnes, & Handley-Schachler, 2017;Tarjo, Anggono, & Sakti, 2021;Tarjo & Herawati, 2015), dan Dechow F-Score Model (Dechow, Ge, Larson, & Sloan, 2011;Dechow, Hutton, Kim, & Sloan, 2012;Tarjo et al, 2023).…”

“…AEM untuk memprediksi potensi manipulasi laba pada bagian akrual (Sakti, Maduratna, & Firdaus, 2024). REM dapat mendeteksi manipulasi laba yang barasal dari arus kas, beban, dan biaya produksi (Tarjo et al, 2022). Terakhir, Benesih M-score dan Dechow F-score adalah metode untuk memprediksi manipulasi laba yang mengandung fraud (Tarjo et al, 2021(Tarjo et al, , 2023Tarjo & Herawati, 2015).…”