The study arrives at a time when transparency and accountability have become increasingly important across healthcare businesses. Investors, regulators, and the public rely on accurate financial statements to evaluate a company's financial health, particularly in an industry that requires large capital investments, complex accounting practices, and continuous public trust.
Financial statement fraud remains one of the most difficult forms of corporate misconduct to detect because it is often carried out by individuals with authority over financial reporting. Manipulated financial statements can mislead investors, distort market confidence, and result in significant financial losses for stakeholders.
To better understand why such fraud occurs, Suryati and Ferry Adang applied the Fraud Pentagon Theory, a framework that explains financial fraud through five major factors: pressure, opportunity, rationalization, competence, and arrogance. The researchers also investigated whether Good Corporate Governance (GCG) could function as an effective control mechanism capable of reducing fraud risk.
Examining Indonesia's Healthcare Companies
The researchers examined financial statements and annual reports from 11 healthcare companies listed on the Indonesia Stock Exchange over a three-year period from 2022 to 2024, resulting in 33 company-year observations.
Rather than relying solely on reported financial performance, the researchers used the internationally recognized Beneish M-Score model to identify potential financial statement manipulation. Corporate governance quality was measured using a Good Corporate Governance score based on 26 governance indicators covering shareholder rights, board effectiveness, transparency, corporate responsibility, and management oversight.
The statistical analysis allowed the researchers to evaluate how each Fraud Pentagon element influenced the probability of financial statement fraud while simultaneously assessing the role of corporate governance.
Four Fraud Drivers Increase Manipulation Risk
The results reveal that four of the five Fraud Pentagon elements significantly increase the likelihood of financial statement fraud.
The strongest fraud drivers identified in the study include:
- Financial pressure (Financial Stability): Companies experiencing fluctuations in assets or financial instability face greater pressure to present favorable financial performance, increasing the likelihood of earnings manipulation.
- Weak monitoring (Opportunity): Insufficient oversight by independent commissioners creates opportunities for management to manipulate financial reports.
- Auditor changes (Rationalization): Frequent changes of external auditors may increase the risk of "opinion shopping," where companies seek auditors perceived as more accommodating.
- Director turnover (Competence): Leadership transitions can weaken internal controls and create conditions that facilitate financial reporting manipulation.
Interestingly, the fifth Fraud Pentagon factor—CEO arrogance, measured by the number of CEO photographs appearing in annual reports—did not have a statistically significant influence on financial statement fraud. According to the researchers, this measurement may not adequately capture executive narcissism because most companies displayed only one or two CEO photographs, resulting in limited variation.
Corporate Governance Provides the Strongest Protection
The study's most important finding is the substantial impact of Good Corporate Governance in reducing fraud risk.
Corporate governance showed a strong negative relationship with financial statement fraud, indicating that companies with stronger governance systems are considerably less likely to manipulate financial reports.
Overall, the statistical model explained 77.4% of the variation in financial statement fraud among the sampled healthcare companies, demonstrating that governance quality and Fraud Pentagon factors together provide a powerful explanation for fraudulent financial reporting.
According to Suryati and Ferry Adang of Tarumanagara University, effective governance mechanisms—including competent independent commissioners, qualified audit committees, transparent reporting practices, and strong internal controls—serve as the most effective defense against financial reporting manipulation. Rather than focusing only on individual fraud risk factors, organizations should strengthen governance structures that prevent opportunities for fraud from emerging.
Implications for Regulators and Businesses
The findings carry important implications for Indonesia's financial regulators and corporate leaders.
For the Financial Services Authority (OJK), the study suggests that existing governance requirements may need further strengthening. The researchers recommend increasing the effectiveness—not merely the number—of independent commissioners, requiring stronger accounting expertise within audit committees, and implementing stricter oversight of auditor changes.
Healthcare companies can also benefit by investing in stronger internal control systems, improving board oversight, establishing independent monitoring committees, and implementing comprehensive whistleblowing systems capable of detecting financial irregularities at an early stage.
For investors, the research highlights that corporate governance quality should be considered alongside financial performance when evaluating investment opportunities. Companies with stronger governance frameworks are more likely to produce reliable financial reports and maintain long-term transparency.
Future Research Directions
The authors note that future studies should develop more comprehensive ways to measure executive arrogance, potentially incorporating executive compensation, leadership communication styles, media exposure, or artificial intelligence-based text analysis.
They also recommend expanding research across additional industries and longer observation periods to determine whether governance plays a similarly strong protective role beyond Indonesia's healthcare sector.
Author Profile
Suryati is a researcher in the Faculty of Economics and Business, Tarumanagara University, Indonesia. Her research focuses on financial accounting, financial statement fraud detection, forensic accounting, and corporate governance.
Ferry Adang, is an academic at the Faculty of Economics and Business, Tarumanagara University. His expertise includes auditing, forensic accounting, corporate governance, financial reporting, and fraud prevention.
Source
Article Title: Analysis Fraud Pentagon Against Financial Statement Fraud with Corporate Governance as A Control Mechanism
Authors: Suryati; Ferry Adang
Journal: International Journal of Economic, Finance and Business Statistics (IJEFBS)
Year: 2026
DOI: https://doi.org/10.59890/ijefbs.v4i3.12
URL: http://journalijefbs.my.id/index.php/ijefbs
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