Fraud Pentagon and financial statement fraud: The moderating role of audit opinion in Indonesian Pharmaceutical Companies
DOI:
https://doi.org/10.26905/afr.v8i2.17973Keywords:
Audit opinion, Beneish M-Score, Financial statement fraud, Fraud Pentagon, Pharmaceutical companiesAbstract
Financial statement fraud can diminish investor confidence and distort assessments of a company's performance. Therefore, identifying potential fraud requires an understanding of the factors that may drive the manipulation of financial statements, as well as the conditions that allow these factors to emerge. This study examines the influence of the elements within the "fraud pentagon" on financial statement fraud, with the audit opinion serving as a moderating variable, focusing on pharmaceutical companies in Indonesia. Employing a quantitative approach, this research analyzes secondary data from audited financial statements and annual reports of 10 pharmaceutical companies listed on the Indonesia Stock Exchange (IDX) between 2019 and 2023, resulting in 50 firm-year observations selected via purposive sampling. Financial statement fraud is measured using the Beneish M-Score, while the elements of the fraud pentagon—pressure, competence, opportunity, rationalization, and arrogance—are proxied, respectively, by financial stability, changes in the board of directors, ineffective monitoring, auditor turnover, and the frequency of the CEO’s photograph appearing in annual reports. Logistic regression and moderation analysis were used to test the hypotheses. The results indicate that pressure has a significant relationship with financial statement fraud, whereas the other four elements of the fraud pentagon do not show a significant individual influence. Audit opinion is found to moderate the relationship between pressure, opportunity, and arrogance with financial statement fraud, but it does not moderate the relationships involving the elements of competence and rationalization. These findings underscore the importance of considering the audit opinion when evaluating fraud risk indicators in pharmaceutical companies.
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