Association between fraudulent financial reporting, readability of annual reports, and abusive earnings management: A case of Indonesia
-
DOIhttp://dx.doi.org/10.21511/imfi.19(1).2022.29
-
Article InfoVolume 19 2022, Issue #1, pp. 370-378
- Cited by
- 1124 Views
-
447 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
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.
Acknowledgments
Rector 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.
- Keywords
-
JEL Classification (Paper profile tab)G14, G32, O16
-
References59
-
Tables2
-
Figures0
-
- Table 1. Variable descriptive statistics
- Table 2. Multiple regression results
-
- Aghghaleh, S. F., Mohamed, Z. M., & Rahmat, M. M. (2016). Detecting Financial Statement Frauds in Malaysia: Comparing the Abilities of Beneish and Dechow Models. Asian Journal of Accounting and Governance, 7, 57-65.
- Association of Certified Fraud Examiners Indonesia (ACFE). (2019). Survei Fraud Indonesia 2019. (In Indonesian).
- Aviantara, R. (2021). The Association Between Fraud Hexagon and Government’s Fraudulent Financial Report. Asia Pacific Fraud Journal, 6(1), 26-42.
- Bacha, S., & Ajina, A. (2020). CSR performance and annual report readability: evidence from France. Corporate Governance, 20(2), 201-215.
- Bhardwaj, M. A., & Gupta, D. R. (2018). Qualitative analysis of financial statements for fraud detection. Proceedings of IEEE 2018 International Conference on Advances in Computing, Communication Control and Networking, 318-320.
- Blanco, B., Coram, P., Dhole, S., & Kent, P. (2021). How do auditors respond to low annual report readability? Journal of Accounting and Public Policy, 40(3), 106769.
- Bonsall, S. B., & Miller, B. P. (2017). The impact of narrative disclosure readability on bond ratings and the cost of debt. Review of Accounting Studies, 22(2), 608-643.
- Buchholz, F., Lopatta, K., & Maas, K. (2020). The Deliberate Engagement of Narcissistic CEOs in Earnings Management. Journal of Business Ethics, 167(4), 663-686.
- Cheng, J., Zhao, J., Xu, C., & Gong, H. (2018). Annual Report Readability and Earnings Management: Evidence from Chinese Listed Companies. Proceedings of the 2018 4th International Conference on Social Science and Higher Education, 794-797.
- Dalwai, T., Mohammadi, S. S., Chugh, G., & Salehi, M. (2021). Does intellectual capital and corporate governance have an impact on annual report readability? Evidence from an emerging market. International Journal of Emerging Markets.
- Dechow, P. M., Hutton, A. P., Kim, J. H., & Sloan, R. G. (2012). Detecting Earnings Management: A New Approach. Journal of Accounting Research, 50(2), 275-334.
- Dong, W., Liao, S., & Liang, L. (2016). Financial statement fraud detection using text mining: A Systemic Functional Linguistics theory perspective. Proceeding of the 2016 Pacific Asia Conference on Information Systems.
- Du Toit, E. (2017). The readability of integrated reports. Meditari Accountancy Research, 25(4), 629-653.
- El-Sayed, D. H., Adel, E., Elmougy, O., Fawzy, N., Hatem, N., & Elhakey, F. (2021). The influence of narrative disclosure readability, information ordering and graphical representations on non-professional investors’ judgment: evidence from an emerging market. Journal of Applied Accounting Research, 22(1), 138-167.
- Ezat, A. N. (2019). The impact of earnings quality on the association between readability and cost of capital: Evidence from Egypt. Journal of Accounting in Emerging Economies, 9(3), 366-385.
- Fang-Klingler, J. (2019). Impact of Readability on Corporate Bond Market. Journal of Risk and Financial Management, 12(4), 184.
- Goel, S., Gangolly, J., Faerman, S. R., & Uzuner, O. (2010). Can linguistic predictors detect fraudulent financial filings? Journal of Emerging Technologies in Accounting, 7(1), 25-46.
- Habib, A., & Hasan, M. M. (2020). Business strategies and annual report readability. Accounting and Finance, 60(3), 2513-2547.
- Harris, D. G., Shi, L., & Xie, H. (2018). Does benchmark-beating detect earnings management? Evidence from accounting irregularities. Advances in Accounting, 41, 25-45.
- Hasan, M. M., & Habib, A. (2020). Readability of Narrative Disclosures, and Corporate Liquidity and Payout Policies. International Review of Financial Analysis.
- Hesarzadeh, R., & Bazrafshan, A. (2018). Corporate reporting readability and regulatory review risk. Baltic Journal of Management, 13(4), 488-507.
- Humpherys, S. L., Moffitt, K. C., Burns, M. B., Burgoon, J. K., & Felix, W. F. (2011). Identification of fraudulent financial statements using linguistic credibility analysis. Decision Support Systems, 50(3), 585-594.
- Hung, D. N., Ha, H. T. V., & Binh, D. T. (2017). Application of F-Score in Predicting Fraud, Errors: Experimental Research in Vietnam. International Journal of Accounting and Financial Reporting, 7(2), 303-322.
- Jamil, A. H., Mohd Sanusi, Z., Yaacob, N. M., Mat Isa, Y., & Tarjo, T. (2022). The Covid-19 impact on financial crime and regulatory compliance in Malaysia. Journal of Financial Crime, 29(2), 491-505.
- Jayasree, M., & Shette, R. (2021). Readability of Annual Reports and Operating Performance of Indian Banking Companies. IIM Kozhikode Society & Management Review, 10(1), 20-30.
- Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305-360.
- Jones, J. J. (1991). Earnings Management During Import Relief Investigations. Journal of Accounting Research, 29(2), 193-228.
- Kamaruddin, S. S., Bakar, A. A., Hamdan, A. R., Nor, F. M., Nazri, M. Z. A., Othman, Z. A., & Hussein, G. S. (2015). A text mining system for deviation detection in financial documents. Intelligent Data Analysis, 19(S1), S19-S44.
- Kawada, B. S., & Wang, J. J. (2020). Annual report readability subsequent to going-concern opinions. Managerial Auditing Journal, 35(1), 24-42.
- Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45(2-3), 221-247.
- Liu, M., & Liu, Z. (2021). Does annual report readability explain the accrual anomaly? Asian Review of Accounting, 29(3), 307-331.
- Lo, K., Ramos, F., & Rogo, R. (2017). Earnings management and annual report readability. Journal of Accounting and Economics, 63(1), 1-25.
- Luo, J., Li, X., & Chen, H. (2018). Annual report readability and corporate agency costs. China Journal of Accounting Research, 11(3), 187-212.
- Md Nasir, N. A., Ali, M. J., Razzaque, R. M. R., & Ahmed, K. (2018). Real earnings management and financial statement fraud: evidence from Malaysia. International Journal of Accounting and Information Management, 26(4), 508-526.
- Minhas, S., & Hussain, A. (2016). From Spin to Swindle: Identifying Falsification in Financial Text. Cognitive Computation, 8(4), 729-745.
- Mnif, Y., & Kchaou, J. (2021). Through the rhetoric art: CEO incentives in sustainability sensitive industries. Meditari Accountancy Research.
- Moffitt, K., & Burns, M. B. (2009). What does that mean? Investigating obfuscation and readability cues as indicators of deception in fraudulent financial reports. Proceedings of the 15th Americas Conference on Information Systems 2009 (AMCIS 200), 2962-2970.
- Morris, J., Swier-Vosnos, A., Woodworth, C., Umfleet, L. G., Czipri, S., & Kopald, B. (2014). Development of alternate paragraphs for the logical memory subtest of the wechsler memory scale-IV. Applied Neuropsychology: Adult, 21(2), 143-147.
- Omar, N., Johari, Z. A., & Smith, M. (2017). Predicting fraudulent financial reporting using artificial neural network. Journal of Financial Crime, 24(2), 362-387.
- Othman, I. W., Hasan, H., Tapsir, R., Rahman, N. A., Tarmuji, I., Majdi, S., Masuri, S. A., & Omar, N. (2012). Text readability and fraud detection. Proceedings of the ISBEIA 2012 – IEEE Symposium on Business, Engineering and Industrial Applications, 296-301.
- Pajuste, A., Poriete, E., & Novickis, R. (2021). Management reporting complexity and earnings management: evidence from the Baltic markets. Baltic Journal of Management, 16(1), 47-69.
- Perols, J. L., & Lougee, B. A. (2011). The relation between earnings management and financial statement fraud. Advances in Accounting, 27(1), 39-53.
- Price, R. A., Sharp, N. Y., & Wood, D. A. (2011). Detecting and predicting accounting irregularities: A comparison of commercial and academic risk measures. Accounting Horizons, 25(4), 755-780.
- Ramírez-Orellana, A., Martínez-Romero, M. J., & Mariño-Garrido, T. (2017). Measuring fraud and earnings management by a case of study: Evidence from an international family business. European Journal of Family Business, 7(1-2), 41-53.
- Ratmono, D., Darsono, D., & Cahyonowati, N. (2020). Financial Statement Fraud Detection with Beneish M-Score and Dechow F-Score Model: An Empirical Analysis of Fraud Pentagon Theory in Indonesia. International Journal of Financial Research, 11(6), 154.
- Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335-370.
- Sakti, E., Tarjo, Prasetyono, & Riskiyadi, M. (2020). Detection of Fraud Indication in Financial Statement Using Financial Shenanigans. Asia Pacific Fraud Journal, 5(2), 277-287.
- Schilit, H. M., Perler, J., & Engelhart, Y. (2018). Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports. The McGraw-Hill Companies, Inc.
- Seifzadeh, M., Salehi, M., Abedini, B., & Ranjbar, M. H. (2021). The relationship between management characteristics and financial statement readability. EuroMed Journal of Business, 16(1), 108-126.
- Soepriyanto, G., Tjokroaminoto, S., & Zudana, A. E. (2021). Annual report readability and accounting irregularities: evidence from public listed companies in Indonesia. Journal of Financial Reporting and Accounting, 19(5), 793-818.
- Sukotjo, C., & Soenarno, Y. (2018). Tax aggressiveness, accounting fraud, and annual report readability. Journal of Finance and Economics, 6(2), 38-42.
- Tarjo, & Anggono, A. (2020). Abusive Earnings Management and Annual Report Readability. Proceedings of the 4th Padang International Conference on Education, Economics, Business and Accounting (PICEEBA-2 2019).
- Tarjo, & Herawati, N. (2015). Application of Beneish M-Score Models and Data Mining to Detect Financial Fraud. Procedia - Social and Behavioral Sciences, 211, 924-930.
- Tarjo, Anggono, A., & Sakti, E. (2021a). Detecting Indications of Financial Statement Fraud: a Hexagon Fraud Theory Approach. AKRUAL: Jurnal Akuntansi, 13(1), 119-131.
- Tarjo, Anggono, A., Sanusi, Z. M., & Said, J. (2021b). The Effect of Fraud Risk Management on Fraud Prevention. International Journal of Social Science Research, 3(4), 397-404.
- Wong, I. C. K. (1999). Readability of patient information leaflets on antiepileptic drugs in the UK. Seizure, 8(1), 35-37.
- Xu, Q., Fernando, G., Tam, K., & Zhang, W. (2020). Financial report readability and audit fees: a simultaneous equation approach. Managerial Auditing Journal, 35(3), 345-372.
- Yadav, A. K. S., & Sora, M. (2021). Fraud detection in financial statements using text mining methods: A review. IOP Conference Series: Materials Science and Engineering, 1020(1).
- Zhong, K., Wang, F., & Zhou, L. (2017). Deferred Revenue Changes as a Leading Indicator for Future Financial Performance: Evidence from China. Asian Review of Accounting, 25(4), 549-568.