DETECTING FRAUDULENT FINANCIAL REPORTING WITH FRAUD HEXAGON ANALYSIS

Abstract

Fraudulent financial reporting is a crucial issue that can undermine investor confidence and capital market stability. This study aims to analyze in depth the influence of the Fraud Hexagon elements on detecting fraudulent financial reporting. The six elements include: 1)pressure (stimulus), 2) opportunity, 3) rationalization, 4) capability, 5) arrogance, and 6) collusion. Financial Report Fraud (Y) is measured by F-Score = Accrual Quality + Financial Performances. While pressure (X1) is measured using financial stability (X1.1), external pressure (X1.2), and financial targets (X1.3). Opportunity (X2) is measured by ineffective monitoring (X2.1) and the nature of the industry (X2.2). Rationalization (X3) is measured using the total accrual ratio, Capability (X4) is measured by board of directors turnover, Arrogance (X5) is measured using the frequency of CEO photos, and Collusion (X6) is proxied through cooperation with the government. The study focused on infrastructure sector companies that went public during the period 2022 to 2024. The infrastructure sector was chosen because it is a large project that requires high investment, and is closely related to government projects. The study uses a quantitative approach with secondary data from the company's annual report. The sampling technique used purposive sampling, which resulted in a final sample of 35 companies over three years of observation, resulting in a total of 105 observation data. The data analysis technique used multiple linear regression analysis, with IBM SPSS to test the research hypothesis. The results of the Adjusted R Square value showed the influence of independent variables on the dependent variable in this study was 84.6%, while the remaining 15.4% was explained by other variables outside the research model. Variables X1.2 external pressure and X1.3 financial target, X2.2 nature of industry, X3 (Rationalization, measured by TATA), X4 (Ability, measured using change in director) and X5 (Arrogance, measured by CEO photo) were proven to have a positive effect on financial statement fraud. Conversely, X1 (Pressure, measured by financial stability), X2 (Opportunity measured by ineffective monitoring), and X6 (Collusion measured using cooperation with the government) had no effect on financial statement fraud. These findings provide important implications for stakeholders to be more aware of indicators of aggressive financial targets, opportunities, rationalization, managerial capabilities, and arrogance as key signals of potential financial report manipulation in the infrastructure sector.