Fraud diamond insights: Predictors of financial statement fraud in the financial services sector

Abstract

Orientation: Indonesia’s financial services sector faces significant challenges because of financial statement fraud, undermining economic stability and stakeholder confidence.
Research purpose: This study investigates the predictive power of the Fraud Diamond framework in detecting financial statement fraud, focusing on financial stability, external pressure, ineffective monitoring and rationalisation in this critical industry.
Motivation for the study: Despite the high incidence of fraud in Indonesia’s financial sector, limited empirical research addresses its key determinants, prompting this study to fill the gap.
Research design, approach and method: Using multiple linear regression analysis, data from 63 publicly listed companies on the Indonesia Stock Exchange in the period of five year (170 from the Main board and 145 from the Development board) were analysed. Fraud Diamond variables were tested for their predictive capabilities across these groups.
Main findings: Financial stability consistently predicts fraud across all companies. However, ineffective monitoring and rationalisation significantly impact only in Development board companies, while external pressure shows no substantial effect in either group.
Practical/managerial implications: These findings highlight the need for enhanced financial stability frameworks and oversight mechanisms to mitigate fraud risks. For Development board firms, governance reforms and addressing rationalisation tendencies are critical to combating fraud.
Contribution/value-add: By extending the Fraud Diamond model to an emerging market, this study provides nuanced insights into the dynamics of financial statement fraud and offers a foundation for targeted anti-fraud strategies tailored to Indonesia’s financial sector.