RISK MANAGEMENT AND OTHER FACTORS PREVENTING FRAUDULENT FINANCIAL REPORTING BY STATEOWNED ENTERPRISES IN INDONESIAAsian Economic and Financial Review

Asian Economic and Financial Review
ISSN(e): 2222-6737
ISSN(p): 2305-2147
DOI: 10.55493/5002.v12i8.4587
Vol. 12, No. 8, 686-711.
© 2022 AESS Publications. All Rights Reserved.
URL: www.aessweb.com
RISK MANAGEMENT AND OTHER FACTORS PREVENTING

FRAUDULENT FINANCIAL REPORTING BY STATE-OWNED
ENTERPRISES IN INDONESIA
R. Ait Novatiani1+ Faculty of Economics and Business, Padjadjaran University, and Faculty of
1
Economics and Business, Widyatama University, Indonesia.

Nunuy Nur Afiah2 1
Email: [email protected] Tel: +6281321736537
Roebiandini
2,3
Faculty of Economics and Business, Padjadjaran University, Indonesia.
2
Email: [email protected] Tel: +6285624610320 (+ Corresponding author)
Sumantri3 3
Email: [email protected] Tel: +628122019225
ABSTRACT
Article History This study aims to provide an overview of the effects of risk management and the
Received: 6 April 2022 implementation of good corporate governance (GCG), and the effectiveness of the
Revised: 25 July 2022
Accepted: 9 August 2022 internal audit function on the prevention of fraudulent financial reporting and its impact
Published: 19 August 2022 on the quality of financial reporting of state-owned enterprises (SOEs) in Indonesia.
Questionnaires are used to determine risk management and other factors that influence
Keywords each other and their impact on the quality of financial reporting. The questionnaire and
Risk management
Good corporate governance survey results of 90 state-owned enterprises (BUMN) and 360 respondents. SEM-PLS
Internal audit function was used to analyze the data, and the results show that the implementation of GCG, the
effectiveness
Financial reporting quality effectiveness of the internal audit function and risk management have an effect on
Fraudulent financial reporting financial reporting. This is based on the results of research stating that the effectiveness
prevention.
of the internal audit function is able to prevent financial reporting fraud. The
professionalism of the internal auditor, who must carry out audits in a correct and
JEL Classification: professional manner, demonstrates their credibility. This, and audit training, is often not
G32, G30, M42, G28, G30.
optimal.
Contribution/Originality: In contrast to the focus of previous research, this study highlights fraud in financial
reporting that occurs in SOEs because there are still many who manipulate data to make profits look bigger and to
receive bonuses or awards. Furthermore, this is the first time that state-owned enterprises in Indonesia have been
used as the sample.
1. INTRODUCTION
State-owned enterprises (SOEs) are a combination of public and private sector businesses. They are market-
oriented and self-sustaining businesses, but the state retains a large stake through majority or full ownership (Bruton,
Peng, Ahlstrom, Stan, & Xu, 2015). SOEs are business entities whose capital is largely owned by the state either
directly or indirectly through distinguished state wealth. The term ‘state ownership’ is typically used to denote
control. By offering products and services in domestic and foreign markets, SOEs significantly contribute to the
economy. Simultaneously, the government uses SOEs for a variety of additional purposes, including strategic resource
and technology management, large-scale job maintenance and national brand promotion.
Economic and financial crime is closely related to changes and progress in society and has the potential to increase
as a result of human creativity to adapt to changes in society (Achim, Văidean, Borlea, & Florescu, 2021). Recent
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Asian Economic and Financial Review, 2022, 12(8): 686-711
corporate scandals in financial institutions worldwide have raised huge concerns among investors and regulators, not
least in Asian countries as well as SOEs (Tao & Hutchinson, 2013) regardless of whether the global financial crisis was
a result of excessive risk taking. While the risks faced by companies are due to global influence and revolution of industry
4.0, business actors are also surprisingly challenged by the impact of the rapid development of the industrial revolution,
which makes it more difficult for the companies and entrepreneurs to overcome (Tai, Lai, & Yang, 2020).
In many cases, there are signs or indicators of fraud in financial reporting, and decision makers should be aware
of these signs to prevent poor decisions being made; however, such corruption persists resulting in loss of investor
confidence, reputational damage and the emergence of potential fines that will then lead to criminal acts (Ernst Jr &
Young, 2010). The destruction of large companies, such as Enron, Global Crossing and World Com caused by the
amount of fraud in their financial reporting, led to a decrease in the level of trust from shareholders, financial markets
and the global community in general (Law, 2011).
Various forms of fraud related to accounting scandals, and confidence in the reliability and objectivity of financial
statements for interested parties, have occurred significantly. In this context, the management, board of directors,
audit committee, external auditors and internal auditors have an important role in ensuring quality and reliable
financial reporting (Zager, Malis, & Novak, 2016). Fraud in financial reporting occurs as a result of misrepresentation
due to planned irregularities in financial statements to outwit users of financial information and improper actions on
assets or misappropriations related to generally accepted accounting principles in Indonesia. Many studies have been
conducted to illustrate the fraud occurring in financial reporting in companies in the field of financial services,
especially both government and private banks (Al-Hashedi & Magalingam, 2021; Asteriou, Pilbeam, & Tomuleasa,
2021; Blass & Grossman, 1996; Di, Shaiban, & Hasanov, 2021; Flore, Degryse, Kolaric, & Schiereck, 2021;
Königstorfer & Thalmann, 2020; Silva, 2021; Zhao, Li, Yu, Chen, & Lee, 2022).
In contrast to the focus of previous research, the current research highlights fraud in financial reporting that
occurs in Indonesia, especially in SOEs, as many of these still manipulate accounting data to make their profits look
greater to obtain bonuses or awards. Given that fraudulent acts are often hidden and rarely made public, calculating
the total loss poses significant complications. The actual costs of fraud may be higher because they include indirect
costs associated with losses to investors, creditors, and employee credibility, as well as the reputation of the company
as a result of future crises. In extreme cases, fraud can result in bankruptcy (Ahmad, Ciupac-Ulici, & Beju, 2021). In
addition, public accountants are believed to have covered up fraud and did not make corrections (Hasan, 2013).
Table 1 shows several companies, including state-owned enterprises in Indonesia, that experienced substantial
losses due to fraud in financial reporting. PT Garuda Indonesia suffered a loss of USD 244.95 million; this happened
due to an error in the 2018 financial statements, and in 2017, PT Life Insurance was found to have engineered its
financial statements. The financial reporting was not carried out in accordance with the guidelines, and the company
suffered a loss of Rp. 7.7 trillion. In 2018, an inspection of PT Pos Indonesia by the Internal Supervisory Unit of PT
Pos Indonesia Regional Office in Medan found that there was an abuse of 6000 stamps, and the loss was estimated at
Rp. 2 billion. PT Waskita Karya was found to have made improper recordings, namely the excess recording of net
income in the 2004–2007 financial reports, resulting in a loss of Rp. 400 billion, and PT Kereta Api Indonesia (KAI)
was found to have engineered the numbers in its 2005 financial report, which resulted in a loss of Rp 600 billion.
Based on the facts, we focused this research on the following three questions: How do corporate governance failures
affect risk management? What is the impact of corporate governance failures on the financial reporting of SOEs in
Indonesia? Why would a trusted public accountant cover up fraud and not correct errors?
The current study aims to estimate the impact of corporate governance failures on risk management and false
financial reporting on SOEs in Indonesia. Accordingly, we analyzed a sample of 90 SOEs in Indonesia using the
structural equation model (SEM) based on partial least squares (PLS) variance because the measurement model is
formed by variables that have both formative and reflective indicators. The SEM-PLS model consists of an outer
model (measurement model) and an inner model (structural model).
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Table 1. Cases of fraud that occurred in SOEs.

Name of BUMN Causes/Root Causes Loss
PT Garuda Indonesia There was an error in the presentation of the Loss of USD 244.95
financial statements in 2018, namely increased million
profits.
Garuda Indonesia should have recorded a loss
of USD 244.95 million in 2018, but in the
financial statements, it showed a net profit of
USD 809.84 thousand, a sharp increase from
2017, which recorded a loss of USD 216.58
million. This is because PT Garuda was too
quick to recognize revenue, and the recognition
of income is not in line with PSAK 23. PSAK 23
explains that income must be recognized by the
time the work has been completed or
performance obligations have been fulfilled.
PT Life Insurance The 2017 financial statements of PT Life Rp 7.7 trillion
Insurance were found to have been
manipulated. The company recorded a profit of
Rp 360.3 billion but received an adverse opinion
due to a shortage in backup of Rp 7.7 trillion. If
a backup is carried out in accordance with the
rules, the company suffers a loss.
PT Pos Indonesia In 2018, based on the results of an inspection Estimated to be worth
conducted by the Medan Regional I Rp 2 billion.
Supervisory Unit, it was found that there were
349,000 stamps misused with a unit price of Rp
6,000 so the total loss was estimated at Rp
2,094,000,000.
PT Waskita Karya The new President Director of PT Waskita Rp 400 billion
Karya found that there was an inappropriate
recording of the excess net profits in the
financial report for 2004–2007.
PT Indonesian Railways In its 2005 financial report, the company Rp 600 billion
(KAI) recorded a profit of Rp 6.9 billion instead of
correctly recording a loss of Rp 600 billion.
Our results are very strong and highlight the effect of Risk Management on False Financial Reporting on the
quality of financial statements, the Effect of Good Corporate Governance on False Financial Reporting on the quality
of financial statements and the Effect of the Internal Audit Function on False Financial Reporting on the quality of
financial statements. We also found the impact of False Financial Reporting on the quality of financial statements.
The significance of our research lies in its accurate estimates and strong results that provide results regarding the
impact of corporate governance failures on risk management and false financial reporting on SOEs in Indonesia.
The remainder of this paper is organized as follows: the next section contains a detailed literature review of the
main determinants of good corporate governance, risk management and fraudulent financial reporting; Section 3
describes the methodology and data; Section 4 contains the results; and Section 5 concludes the study.
2. LITERATURE REVIEW
2.1. Implementation of Good Corporate Governance and Fraudulent Financial Reporting
Businesses that change their corporate identity without changing their operations are more likely to commit
financial reporting fraud. The positive correlation between company renaming and financial reporting fraud was
stronger in non-state-owned companies and companies with lower concentrations of ownership. In addition, evidence
proves that company renaming is more likely to be associated with disclosure-related fraud, and the likelihood of
fraudulent behavior grows as company renaming becomes more common. In general, the study's findings provide a
new red signal for regulators and investors conducting financial fraud investigations. The work is topical and has
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policy implications for market regulators who want to build and strengthen emerging capital markets with generally
weak and unclear information environments (Zhang, Zhang, & Yao, 2022).
Furthermore, research on the following groups of factors that contribute to fraudulent behavior includes the
influence of internal people and issuers (including individuals whose internal information has not been discovered by
the company), the collusion of issuers and securities firms, the power held by influential individuals within the
company, the complex organizational structure of the issuing (one person handling multiple positions), and the failure
of the issuer to properly control the information internally; (ii) fraudulent investors (Nguyen, Nguyen, Nguyen,
Selvarajan, & Baskaran, 2022). Improved risk-taking management also increases the likelihood of financial fraud
(Johnson, Lowe, & Reckers, 2021). Having an independent board of directors that is separate from management is
very important for auditors. In addition, we expanded our audit and governance committee board analysis to show
that organizations in the fraud and non-fraud industries sensed a link between weak governance procedures and
financial fraud across multiple time periods and industries. Whenever the governance system is inadequate, the
auditor must consider the impact of the audit (Beasley, 2000).
Good corporate governance (GCG) is an effort to prevent fraudulent financial statements (Kusumaningtias,
Ludigdo, Irianto, & Mulawarman, 2016). This is in accordance with the statement that good corporate governance is
one of the efforts to prevent financial reporting that contains elements of fraud (Razali & Arshad, 2014). Implementing
good corporate governance can prevent fraud (Matei & Drumasu, 2015). Effective corporate governance by directors
and management can prevent financial reporting fraud with the implementation of anti-fraud policies, and effective
corporate governance in the form of compliance with the law and openness in government is needed in the public
sector to prevent fraud by using forms of internal control (Iqbal, 2015). Good corporate management in the form of
transparency, accountability, independence and fairness can improve fraud prevention through the implementation of
internal controls, anti-fraud policies, and carefully selected officers (Mahrani & Soewarno, 2018). Good corporate
management means that financial statements reported to the public will be free from accounting errors and fraud.
This implies that good corporate governance in forms such as audit committees, top-level management and
independence of the board of directors, can prevent financial reporting fraud by pressure reduction, opportunity
reduction and justification reduction (Appiah, 2015).
Directors and senior management can help improve fraud prevention through internal controls (Manzaneque,
Priego, & Merino, 2016). Effective corporate management through the board of directors and management can
prevent fraud in financial reporting through internal controls and is important in improving the credibility of financial
reporting. Based on several opinions and research conducted by experts, the implementation of good corporate
governance can be interpreted to have an influence on preventing fraudulent financial reporting (Rezaee, Olibe, &
Minmier, 2003).
2.2. Effectiveness of Internal Audit Functions and Preventing Fraudulent Financial Reporting
Effective internal auditing can be used by companies in an effort to prevent fraudulent financial reporting
(Camfferman & Wielhouwer, 2019). The existence of an internal audit or compliance department can prevent fraud
by creating internal controls, such as audit planning, testing and evaluating information. The submission of audit
findings and results of follow-up examinations, have the biggest role in fraud prevention through the creation of an
honest culture, management's responsibility for evaluating risks and fraud, and supervision to eliminate opportunities
for deception (Roszkowska & Melé, 2021). Improvements in internal auditing, such as independence, competence,
scope of work and implementation of inspection activities, will increase fraud prevention in financial statements
through reduced opportunities and reduced justification (Alleyne & Howard, 2005; Madawaki, Ahmi, & Ahmad, 2022).
Independence and competence can prevent fraudulent financial reporting by implementing internal controls and
conducting management supervision to improve the quality of financial statements (Rifai & Mardijuwono, 2020).
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Companies that conduct internal audits can better detect and prevent fraud through environmental control and
management mechanisms to improve organizational value (Ismael & Roberts, 2018).
2.3. Risk Management and Preventing Fraudulent Financial Reporting

Risk management principles are applied in the public sector in a manner similar to how corporate governance is
applied in private companies. The legislator's proposal aims to contribute to more effective and efficient planning,
organization and execution of public duties (Mormul, 2021). Risk is characterized by measured or unmeasured
uncertainty and significant potential harm (Ali, Hussain, & Iqbal, 2021). Risk increases with the level of exposure and
vulnerability to decreased applicable formalities and proactive management strategies for individuals or
organizations. A company's risk can be reduced through diversification and hedging actions and transferred to third
parties who are prepared to cover it through insurance, factoring and underwriting (Kuo, Lin, & Chien, 2021). The
dominant emigrants choose risky investments in terms of taking over minority shareholders, and stricter governance
mechanisms can help mitigate this opportunistic behavior (Caixe, 2021). As a newly formed subcommittee of the
board of directors, a risk management committee (RMC) serves as an important governance support mechanism for
the oversight of an organization's risk management strategies, policies and processes. However, actual evidence
relating to the existence and types of RMCs remains scarce (Subramaniam, 2009).
A study conducted by Ko, Lee, and Anandarajan (2019) has shown that banks face significant losses as a result of
increased operational risk. To avoid losses, banks must manage operational risks, which includes identification,
assessment, analysis, monitoring and control of operational risks in the presence of sound corporate governance (CG),
which can also contribute to effective operational risk management (ORM) procedures. After conducting research,
CG and operational risk identification (ORI), monitoring and control were found to have a major impact on ORM
procedures at the Pakistan commercial bank (Altaf, Ayub, Shabbir, & Usman, 2021). Corporate governance and
organizational features affect the existence of a risk management committee, and the existence of a risk management
committee affects a company's performance. In addition, the RMC serves as a buffer between corporate governance
and corporate characteristics and their effect on the company's performance (Badriyah, Sari, & Basri, 2015).
Furthermore, (González, Santomil, & Herrera, 2020) stated that the implementation of enterprise risk management
(ERM) had no effect on the performance of Spanish companies (which were assessed by return on equity, return on
assets, or Tobin's Q) and had no effect on the likelihood of bankruptcy. Having a chief risk officer (CRO) can lower
performance while improving financial health assessed from distance to default. In terms of the relationship between
risk hedging and profitability and the level of risk, we observed that hedging exchange rate risk increases profitability
(González et al., 2020).
2.4. Implementation of Good Corporate Governance and Financial Reporting Quality

Improving the quality of financial reporting due to good corporate governance is well implemented (Kaawaase,
Nairuba, Akankunda, & Bananuka, 2021). The higher the governance mechanisms (characteristics of the board, audit
committee, board independence, board size and growth), the higher the quality of financial reporting in the form of
accrual models with the McNichols model in Nigeria (Almaqtari, Hashed, & Shamim, 2021). The establishment of
good corporate governance, such as transparency, accountability, responsibility, independence and fairness, play a
role in producing quality financial statements that are relevant, reliable, comparable and understandable in BPJS
Tangerang (Adiputra, Utama, & Rossieta, 2018). Governance mechanisms using the characteristics of the board of
directors and the company's ownership structure can improve the quality of financial reporting in the form of an
accrual model with the McNichols model in Tunisian companies (Yasser, Al-Mamun, & Hook, 2017). The quality of
the audit committee and internal auditors also has a major contribution in improving the quality of financial
statements in the form of punctuality (Baatwah, Salleh, & Stewart, 2019). Governance mechanisms (board of
commissioners and audit committee) can improve the quality of a company's financial reporting through honest
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presentation to avoid misleading the users in the decision-making process (Kaawaase et al., 2021). Good corporate
management characteristics, such as transparency, board of directors and an independent audit committee, also play
a role in improving the quality of financial reporting (Salehi, Ajel, & Zimon, 2022). Stronger corporate governance
mechanisms in the form of a board of commissioners can support quality financial reporting using an honest and
accurate form of presentation (Kapoor & Goel, 2019). The establishment of effective corporate governance principals,
such as investor and shareholder protection, family principles equivalent to saha'm holders, stakeholders’ roles in
company management, transparency, and the responsibility of the board of directors, can help to ensure that financial
reporting is reliable, comparable, understandable and timely in Jordan (Nazir & Afza, 2018). Good corporate
governance in the form of directors and audit committees does not affect quality financial reporting by using honest
and neutral presentations (Halbouni, Obeid, & Garbou, 2016). Based on previous research, implementing good
corporate governance can have an effect on the quality of financial reporting.
2.5. Effectiveness of Internal Audit Function and Fraudulent Financial Reporting through Financial Reporting Quality
The internal audit function is carried out effectively, thus qualifying financial reporting (Tumwebaze, Bananuka,
Kaawaase, Bonareri, & Mutesasira, 2021). Effective internal auditing can achieve improved quality of financial
reporting (Kaawaase et al., 2021). The high-quality internal audits in the form of independence and competence of
internal auditors can lead to high-quality financial reporting using the accrual model form of the Jones model. Thus,
the function of internal audit in the form of internal auditor independence can improve the quality of financial
reporting in terms of reliability (Bierstaker, Chen, Christ, Ege, & Mintchik, 2013; Tumwebaze et al., 2021). Internal
audit in the form such as internal audit planning, verification and assessment of activities, reports and communication
of audit activities, follow-up and evaluation of results as well as coordination and cooperation with external auditors
can help improve high-quality financial statements by using forms such as relevance and reliability and credibility
(Algabry, Alhabshi, Soualhi, & Alaeddin, 2020).
There are two characteristics that must be possessed by an auditor, namely competence and independence. A
competent auditor has an interest or expertise in his field, while an independent auditor is not controlled by any party.
Audits that are independent and professional were shown to support the improvement of quality financial reports
that are relevant, comparable, reliable and understandable in seven regional governments, such as Karesidenan
Pekalongan, Indonesia (Boskou, Kirkos, & Spathis, 2019).
Internal audit task planning, communication and approval, resource management, internal audit policy and
processing, coordination, program development, audit quality control and follow-ups can improve the quality of local
government financial reporting (Madawaki et al., 2022). The involvement of larger internal audits led to improved
quality financial reporting by banks in Spain (Gras-Gil, Marin-Hernandez, & De Lema, 2012). Good internal
intelligence, authority of the audit committee, audit committee responsibilities, audit committee structure, tenure of
audit committee members, audit committee meetings, audit committee reporting and audit committee performance
will improve the quality of financial statements using basic financial statements frameworks, qualitative
characteristics of financial statements, recognition of elements of financial statements and measurement of the
elements in financial statements. It can also increase confidence in financial statements (Fariha, Hossain, & Ghosh,
2021). On the basis of research conducted by experts, the effectiveness of internal audit functions can have an influence
on the quality of financial reporting.
2.6. Risk Management and Quality of Financial Reporting

Quality financial reporting will improve if risk management is applied in a company (Krause & Tse, 2016). Strong
risk management, including employee participation, consistency, environmental adaptation and socialization,
supports in producing quality financial reporting (Vasile & Croitoru, 2012). Risk management will affect the mindset,
attitudes and actions at work to directly improve the quality of financial reporting. Positive thinking, prudence in all
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business decisions, teamwork, high customer service and innovation that reflect Javanese culture can shape the
behavior from the top level to the bottom level and encourage ethical and transparent business practices to produce
quality financial reporting in terms of reliability in Indonesian insurance companies (Cascio & Boudreau, 2014).
Quality financial services are strongly influenced by risk management in Nigeria (Erin, Adegboye, & Bamigboye,
2022). The greater the risk management, the greater the quality of financial statements (Erin et al., 2022).
2.7. Fraudulent Financial Reporting and Financial Reporting Quality

Preventing fraudulent financial reporting will improve the quality of financial reporting (Dimitrijevic, Jovkovic,
& Milutinovic, 2020). Early prevention of financial reporting fraud using internal controls can improve quality
financial reporting through reliability (Sofyani, Abu Hasan, & Saleh, 2022). Preventing fraud can improve the quality
of the financial statements of the regional government (Shonhadji & Maulidi, 2022). Preventing fraud through fraud
policy supported the improvement of effective financial reporting in Nakuru’s local government (Fossung, Fotoh, &
Lorentzon, 2020). Preventing financial reporting fraud increased the quality of financial reporting by companies listed
on the Nigerian Stock Exchange (Saji, 2021). Preventing accounting fraud through internal controls can help improve
quality financial statements with reference to local government accounting standards, and ensure that financial
statements are presented reliably, clearly, responsibly and timely (Salehi, Bayaz, Mohammadi, Adibian, & Fahimifard,
2020).
Based on previous research, preventing fraudulent financial reporting can have an influence on the quality of
financial reporting. Following the ideas documented above, we set our research hypotheses as follows:
Hypothesis 1: The implementation of good corporate governance affects the prevention of fraudulent financial reporting.
Hypothesis 2: The effectiveness of internal audit functions prevents fraudulent financial reporting.
Hypothesis 3: Risk management affects the prevention of fraudulent financial reporting.
Hypothesis 4: The implementation of good corporate governance affects the prevention of fraudulent financial reporting through
the quality of financial reporting.
Hypothesis 5: The effectiveness of internal audit functions affects fraudulent financial reporting prevention through financial
reporting quality.
Hypothesis 6: Risk management affects the prevention of fraudulent financial reporting through the quality of financial reporting.
Hypothesis 7: Prevention of fraudulent financial reporting affects the quality of financial reporting.
3. METHODOLOGY AND DATA

3.1. Variable Size
Good corporate governance is a structural process used by state-owned organizations to increase the success rate
of business and corporate accountability and to realize the wishes of stakeholders who are still considered in law and
ethical norms. The principle of good corporate governance is the guidance needed by a company in the management
of its business, which is in accordance with the Decree of the Minister of SOEs, Number: Kep-117/M-MBU/2002;
The National Committee on Governance Policy consists of five principles that include transparency, accountability,
fairness, responsibility and independence. The effectiveness of internal audits is shown by the level of achievement
of the internal audit in carrying out quality checks through quality, the professional ability of internal auditors, and
organizational arrangements (Marais, 2004). Preventing fraudulent financial reporting aims to inhibit people who
attempt to commit fraud in financial reporting; therefore, if prevention against financial reporting fraud is
implemented properly, the ability to inhibit people who can potentially commit fraud in financial reporting and reduce
losses due to fraudulence will be stronger (Alqudah, Amran, & Hassan, 2019). Based on the above, preventing false
financial reporting can happen through an environment of control, opportunity identification, and opportunity
assessment. Quality financial reporting will create useful, qualitative information (Nirwana & Haliah, 2018). Based
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on the above, financial reform can be useful if the following criteria are sufficient: reliability, timeliness,
understandability, measurability and relevance.
3.2. Methodology and Data

This study uses a survey method to collect information from several sources to allow comparison, explanation
and clarification about facts related to events and people (Sekaran & Bougie, 2016). The object of the study is to obtain
and analyze more targeted data, and is a collection of components that can be in the form of people and organizations
among others (Sugiyono, 2013). The implementation of good corporate governance includes effective internal audit
functions, risk management, prevention of false financial reporting, and quality financial reporting (Denziana, 2015).
Unit analysis is targeted research in the form of an organization or a region according to the research focus. SOEs
act as the unit of analysis in this study (Arikunto, 2013). A population can be described as a group of individuals,
institutions, objects and populations can also be expressed in terms of elements, boundaries and time (Sekaran &
Bougie, 2016). In this study, the target population consists of 115 SOEs located in Indonesia. The method used in
this study is a probability sampling method with a simple random sampling technique. The minimum sample number
in the study used Slovin’s formula, with a tolerable error rate of 5%. Therefore, the final sample count comprises 90
SOEs. This study uses primary data and secondary data as the source. Primary data were obtained from interviews
and questionnaires, and secondary data were obtained from books, journals, and other published literature and
financial statements. The items in research instruments are structured on the basis of all established indicators. This
study uses clear and simple language to facilitate respondents’ understanding. Respondents in this study were the
Directors of Finance/General Managers (GM) who handle financial statements, Audit Committee members, Internal
Supervision Unit Managers (ISU) and Accounting/Financial Managers.
4. RESULTS
Socialization and questionnaire collection were conducted from January 24, 2021, to June 13, 2021.
Questionnaires were distributed to 90 SOEs in Indonesia via email, shared via the Google form link and also sent via
a document delivery service company (JNE) accompanied by envelopes and stamps for returning the completed
questionnaires. A total of 36 SOEs returned completed questionnaires. Thus, the sample number in this study was 36
SOEs. According to Sekaran and Bougie (2016), samples over 30 and less than 500 are adequate sample sizes in most
studies. The following presents the characteristics of respondents from the results of the questionnaires.
Table 2. Characteristics of respondents.

Characteristics of Respondents Category Frequency Presentation
Position Director of Finance/GM who handles
18 21.7%
financial statements
Audit Committee 8 9.6%
Accounting/Finance Manager 29 34.9%
SPI Manager 28 33.7%
Gender Man 73 88.0%
Woman 10 12.0%
Age Less than 35 years 13 15,7%
35–50 years old 40 48.2%
Over 50 years old 30 36.1%
Education D-3 2 2.4%
S-1 44 53.0%
S-2 32 38.6%
S-3 5 6.0%
Length of Service Less than 3 years 31 37.3%
3–5 years 34 41.0%
More than 5 years 18 21.7%
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Table 2 presents the characteristics of respondents. The Accounting or Finance Manager group is the largest,
with 29 people or 34.9%, the majority of respondents are male (73 people or 88.0%), and in the age category, the
group aged 35–50 years was the largest, with 40 people or 48.2%. In the education category, Strata one (S1) has the
largest number (44 people or 53.0%) and in the length of service category, 3–5 years had the largest number (34
people or 41.0%).
16
14
12
10
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83
X1 X2 X3
Figure 1. Average answer curve for variables X1, X2 and X3.
Based on Figure 1, the average overall response score for the implementation of good corporate governance is
4.41, which falls into the very good category of 4.21–5.00. When viewed from the basis of dimensions, the highest
score is found in the fairness dimension with an average of 4.56, and the lowest score on the independence dimension
has an average of 3.95. Furthermore, the overall average score of responses to the effectiveness of the internal audit
function was 4.2, which is in the very good category (4.21–5.00). When viewed on the basis of its dimensions, the
highest score is on the audit quality dimension, which obtains an average score of 4.60, the lowest value is in the
organizational setting dimension with an average score of 3.89, and the average score of respondents overall for the
risk management variable is 4.12, which is the good range of 3.41–4.20. If viewed on the basis of dimensions, the
highest score is in the Technology Risks dimension, with an average of 4.42, and the lowest score is in the Credit
Risk dimension with an average of 3.92.
12
10
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83
Y Z
Figure 2. Average answer curve for variables Y and Z.
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Based on Figure 2, it shows that the average response score for the fraudulent financial reporting prevention
variable is 3.26, which is in the fairly good category (2.61–3.40). If viewed on the basis of its dimensions, the highest
score is on the opportunity assessment dimension with an average score of 3.76, the lowest value is in the opportunity
identification dimension with an average score of 2.61, and the average score for quality of financial reporting is 4.36,
which is in the very good category (4.21–5.00). When viewed on the basis of dimensions, the highest score is in the
understandable dimension, obtaining an average score of 4.56, and the lowest value is in the comparable dimension
with an average score of 4.20.
4.1. Validity Test and Reliability Test

The validity test results using the product moment correlation (r) derived a correlation coefficient value (r) from
each statement item greater than the critical value of 0.30. The reliability test using Cronbach’s alpha obtained a
reliability coefficient greater than the critical value of 0.70.
4.2. Hypothesis Testing Results

Path coefficients, t-calculates, p-values and R-squared are used in hypothesis testing using SmartPLS 3.3. The
tables below present the results of the structural model tests.
Table 3. Good corporate governance hardness and reliability test.

Variable Dimension VIF Outer weight p-value
Transparency 2.713 0.231 0.000
Accountability 3.283 0.269 0.000
Good Corporate Governance Fairness 4.893 0.377 0.000
Responsibility 2.718 0.165 0.003
Independence 1.972 0.130 0.001
Based on the information in Table 3, the results of the second order show that the five dimensions of
implementing good corporate governance have a VIF value of < 5. This is feasible and shows that there is no
collinearity problem in the five dimensions. The outer weights of the five dimensions are also significant because they
have a p-value < 0.05. This shows that these dimensions are relevant to the construct and are valid. The dimension
of fairness is the strongest in the formation of latent variables for the implementation of good corporate governance,
and the dimension of independence is the weakest. Furthermore, to calculate the composite reliability and the average
variant extract, the following formulas are presented:
The composite reliability formula:
(Σstd.Loading)2
CR = .
(Σstd.Loading)2 +Σe
The average variant extract formula:
Σstd.Loading2
CR = .
Σstd.Loading2 +Σe
E-values are obtained by:
e = 1 − Σstd. Loading 2 .
Table 4 shows that the loading factor value of all dimensions is higher than 0.70, indicating that each of the four
dimensions is valid in reflecting the latent variable of the effectiveness of the internal audit function. The composite
reliability (CR) value of 0.907 is also higher than 0.70, which explains that each dimension of the four variables is
consistent in measuring the effectiveness of the internal audit function. Thus, the latent variables formed have high
consistency.
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Table 4. Variable latent validity and reliability test.

Variable Dimension Loading Factor CR AVE
Effectiveness of Internal Audit Quality 0.890 0.907 0.766
Audit Function Professional Ability of Internal Auditors 0.890 0.907 0.766
Organizational Settings 0.844 0.907 0.766
Risk Management Market Risk 0.926 0.951 0.765
Credit Risk 0.817 0.951 0.765
Risk of Change 0.895 0.951 0.765
Operational Risk 0.880 0.951 0.765
Technology Risk 0.868 0.951 0.765
Fraudulent Financial Control Environment 0.930 0.929 0.814
Reporting Identification of Opportunities 0.916 0.929 0.814
Opportunity Assessment 0.859 0.929 0.814
Quality of Financial Relevance 0.877 0.935 0.782
Reporting Reliability 0.878 0.935 0.782
Comparability 0.886 0.935 0.782
Understandability 0.895 0.935 0.782
Next, the average variance extracted (AVE) value is 0.766, which states that, on average, 76.6% of the information
contained in all dimensions can be reflected through the latent variable of the effectiveness of the internal audit
function. The loading factor value and the average variance extracted (AVE) value have been met in the convergent
validity requirements. Table 4 also shows that the largest loading factor value for the internal audit function
effectiveness variable is owned by the audit quality dimension and the internal auditor's professional ability dimension.
These results indicate that audit quality and professional competence of internal auditors are more important factors
in reflecting the effectiveness of the internal audit function compared to the dimensions of risk management.
Table 5. Summary of structural model test results.

Model Relationship Path
(Path) Coefficient t-count p-value R-Squared
Structure I X1 -> Y 0.377 3.581 0.000 0.450
X2 -> Y 0.316 2.307 0.022
X3 -> Y 0.375 3.897 0.000
Structure II X1 -> Z 0.287 2.098 0.037 0.753
X2 -> Z 0.187 1.851 0.066
X3 -> Z 0.262 2.005 0.046
Y -> Z 0.482 4.818 0.000
Source: Processed data, 2021.
Table 5 shows that the R-squared value of false financial reporting prevention variables is 0.450, proving that
45.0% of false financial reporting prevention variables are influenced by variables in the implementation of good
corporate governance, effectiveness of internal audit functions and risk management. An R-squared of 0.753 exists
on the financial reporting quality variable. This result proves that 75.3% of financial reporting quality variables are
influenced by variables in the implementation of good corporate governance, effectiveness of internal audit functions,
risk management and preventing fraudulent financial reporting.
The hypothesis testing describes the t-count (3.581) and t-table (1.96) values, the p-values (0.000 < 0.05), and
the path coefficient value (0.377). Thus, implementing good corporate governance can have an effect on the prevention
of fraudulent financial reporting. This finding means the better the implementation of good corporate governance,
the better the prevention of false financial reporting.
Good corporate governance is a guideline for companies to achieve business success and must be consistently
applied in SOEs. Based on respondents' answers, the implementation of good corporate governance was in the
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excellent category. The data explains that the implementation of good corporate governance in SOEs in Indonesia is
very good, and the implementation of good corporate governance has been carried out with reference to the Decree
of the Minister of SOEs Number: Kep-117/M-MBU/2002, and the application of good corporate governance has
considered principles that include transparency, accountability, responsibility, independence, and fairness. Below is
the full standardized coefficients model.
Figure 3. Full standardized coefficients model.
Figure 3 shows that the manifest variable with a loading factor of less than 0.4 must be removed from the
measurement model, and a composite reliability value between 0.70–0.90 is said to be satisfactory or consistent.
Furthermore, it can be seen that the loading factor of all indicators is higher than 0.4, thus it can be stated that all
indicators are valid to measure the latent variables.
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The results of this study also strengthen the theory of governance, which states that the process of managing
activities properly and correctly should be carried out in a company to distribute strong services to the community.
The manager (agent) in the implementation of activities must attempt to minimize conflicts of interest to successfully
present the appropriate financial statements requested by shareholders (principal). One approach that can be applied
to these interests is to apply a clear set of rules so that organizations perform optimally (Osborne, 2010; Stoker, 1998).
Transparency is about openness in conveying relevant information about the company. Respondents' answers to
the transparency statements were in the excellent categories, which proves that the information submitted is always
complete and accurate. Financial information and management analysis are always provided to shareholders and are
consistently published over the internet in Indonesia. Accountability is the clarity of functions that contribute to the
effective management of a company. Respondents' answers to the accountability statements were in the excellent
category. This finding proves that SOEs in Indonesia have detailed corporate governance guidelines on the function,
implementation and accountability of each company organ (interest holder), always conduct regular supervision and
evaluation, and implement a reward and punishment system. Justice is impartiality and equality in fulfilling the rights
of stakeholders based on applicable rules. Respondents' answers to the statements of fairness are in the excellent
category, which proves that the rights of stakeholders are always protected in accordance with applicable laws,
stakeholders always obtain relevant information, stakeholders are always given the opportunity to give their opinions,
and shareholders always have the same position in their company (treated fairly in accordance with their
shareholding) in SOEs in Indonesia. Accountability is the management’s conformity to applicable regulations.
Respondents' answers to the statements of accountability are in the excellent category, which proves that SOEs in
Indonesia comply with applicable laws and regulations, carry out corporate social responsibility (CSR), and take
responsibility in every action. If injustice occurs, then they consistently accept the consequences. They should always
provide non-financial and financial information to those authorized to make investment decisions, especially
appropriate and reliable information that is presented on time and can show comparisons. Independence in the
management of the company is carried out professionally without pressure from any party. Respondents' answers to
the declaration of independence were in the good category, which proves that SOEs in Indonesia have complete
professional standards as a foundation of personnel in the company; activities within the company are not under
pressure or do not encounter conflict of interest of any party that is incompatible with the company's principles. The
implementation of good corporate governance, reflected in transparency, accountability, responsibility, independence
and fairness, can prevent fraud in financial reporting (Bahrami, Rezaee, & Clennell, 2012; Indra, Karyono, Ratnawati,
& Malik, 2013; Magnanelli & Izzo, 2017; Rezaee & Riley, 2010; Tabak et al., 2019; Yuhanis, Arafat, & Puspitasari,
2020; Zuhairah Ariff, Wan Izzat, & Ainul Jariah, 2014).
Table 6 contains the results of the hypothesis testing, which shows the t-count value as 2.307, the p-value is
0.022 (> 0.05), and the path coefficient value is 0.316. Therefore, the effectiveness of the internal audit function has
an influence on the prevention of fraudulent financial reporting. Thus, when the internal audit function is effective,
preventing fraudulent financial reporting also becomes effective.
Table 6. Structural model test results.

Type Relationship (Path) Path Coefficient t-count p-value R-Squared
X1 -> Y 0.377 3.581 0.000
Structure I X2 -> Y 0.316 2.307 0.022 0.450
X3 -> Y 0.375 3.897 0.000
X1 -> Z 0.287 2.098 0.037
X2 -> Z 0.187 1.851 0.066
Structure II 0.753
X3 -> Z 0.262 2.005 0.046
Y -> Z 0.482 4.818 0.000
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The effectiveness of the internal audit function is the level of achievement of the organization in carrying out
quality checks through the quality of the audit and the professional ability of internal auditors as well as through
organizational settings. Based on respondents' answers, the effectiveness of internal audit functions obtained excellent
categorization and effectiveness of internal audit functions through audit quality, professional capabilities of internal
auditors and through organizational settings. These data show that the internal audit function of SOEs in Indonesia
is very effective (Moeller, 2010; Tugiman, 2011).
The results of this study also reinforce the theory that auditing is necessary because of the needs of people who
manage other people's properties. Thus, companies deserve to enlist the help of auditors to check the loyalty of
company managers. The goal is to add transparency and clarity to everything (Hylton, 1964). Further, auditing is
the process of collecting and evaluating all pieces of evidence that can be measured in an economic entity conducted
by an independent and competent person. In conducting examinations, an auditor must also work in accordance with
his or her professional standards (Redline et al., 2014).
The quality of an audit is reflected in the examination conducted by the auditor. The respondents' answers to
audit quality reports are in the excellent category. This proves that the internal examiner always plans audits, sets
objectives, and schedules audits, regulatory plans and presentations to the audited parties. The in-house examiner
always conducts the testing and evaluation of information through the collection, analysis, interpretation and
evidence of the veracity of information to support the results of the examination; the results of internal audit findings
are always submitted immediately to the auditee as a test to be followed up; the internal auditing team has a
consistently proactive task of conveying the findings of the audit results to be immediately followed up; the internal
audit team always provides recommendations to management based on the findings that cause losses for companies
in state-owned enterprises in Indonesia. Credibility and professionalism must be owned by the auditor in carrying
out their responsibilities. Respondents' answers to the statements regarding internal auditors' professional abilities
are in the good category, proving that SOEs in Indonesia always perform their duties without being affected by
prejudice, misinterpretation or personal interest. They always use the auditor's code of ethics and professional
standards that contain the principles of auditor behavior, which is a guideline for internal auditors in carrying out
their duties. Specialized training must be undertaken, and expertise must be achieved in the field of auditing financial
statements, thus the overall professional ability of internal auditors can support the effectiveness of internal audits.
Respondents' answers to the regulatory statements were in the good category, which proves that implementing
internal audits consistently requires using formal and technical guidelines. The above proves the effectiveness of the
internal audit function in preventing fraudulent financial reporting (Aji, Berakon, & Md Husin, 2020; Asare & Wright,
2003; Coram, Ferguson, & Moroney, 2008; Jailani, Sugiman, & Apino, 2017; Kassabian et al., 2021; Prawitt, Sharp, &
Wood, 2012; Tunggal, Higgins, & Waddell, 2010).
The information in Table 7 shows that the t-count value (3.897) > t-table (1.96), the p-value is 0.000 (<0.05) and
the path coefficient value is 0.375. Therefore, it is confirmed that risk management has an influence on preventing
wrong financial reporting. Risk management denotes the values within the organization that must be implemented
consistently to achieve the company's defined goals. Based on respondents' answers, risk management was in the good
category. Good risk management includes innovation, the courage to take risks, paying attention to detail, orientation
to results, orientation to the team, and stability. These data show that risk management in SOEs in Indonesia is good
(Judge & Robbins, 2017).
The study also reinforces the theory of organizational behavior, which states that organizational behavior is a
science that addresses a person's perceptions, values and actions when working together within an organization and
analyzes the effects of the outside environment on the organization by explaining three main aspects of organizational
behavior: 1) norms, rules and conflicts; 2) leadership, and 3) organizational aspects, such as structure, culture, policy
and other practices (Judge & Robbins, 2017).
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Table 7. Hypothesis testing results.

Hypothesis Path Coefficient t-count t-table p-value Conclusion
H1 = Implementation of Good Corporate
Governance - Prevention of Fraudulent 0.377 3.581 1.96 0.000 Ho rejected
Financial Reporting
H2 = Effectiveness of Internal Audit
Function - Fraudulent Financial 0.316 2.307 1.96 0.022 Ho rejected
Reporting Prevention
H3 = Risk Management - Fraudulent
0.375 3.897 1.96 0.000 Ho rejected
Financial Reporting Prevention
H4 = Implementation of Good Corporate
Governance on the Quality of Financial 0.287 2.098 1.96 0.037 Ho rejected
Reporting
H5 = Effectiveness of Internal Audit
Function - Quality of Financial 0.187 1.851 1.96 0.066 H1 rejected
Reporting
H6 = Risk Management - Quality of
0.262 2.005 1.96 0.046 Ho rejected
Financial Reporting
H7 = Prevention of Fraudulent Financial
Reporting - Quality of Financial 0.482 4.818 1.96 0.000 Ho rejected
Reporting (Z)
Respondents' answers to innovation statements and the courage to take risks were in the excellent category,
proving that employees are always given the opportunity to develop new ideas with respect to the execution of their
work; employees are always supported to innovate in the workplace and employees’ work demands courage in taking
risks in SOEs in Indonesia. Respondents' answers to statements regarding attention to detail were in the excellent
category, which proves that the duties assigned to employees are always appropriate and consistent with the job
description; every work process is always closely monitored, and if an error occurs, improvement/revision is carried
out consistently in SOEs in Indonesia. Orientation is more focused on results than on the techniques and processes
used in achieving those results. Respondents' answers to the orientation statement were in the good category, which
proves that SOEs in Indonesia always apply quality standards in their work; the implementation of work is followed
by the obligation to write a report, and no leeway is provided to their employees in meeting the target. Thus,
orientation on the overall results can support risk management. Team orientation suggests the activities of a team,
not just individuals.
Respondents' answers to the questionnaire statements are in the superior category, which proves that SOEs in
Indonesia emphasize the importance of teamwork and always give clear tasks to the team. Also, based on the
respondents' answers in the good category proves that SOEs in Indonesia always encourage and appreciate employees
who work hard to show initiative and build a healthy competitive atmosphere in the workplace. Respondents' answers
to the stability statements gained a good category. This finding proves that SOEs in Indonesia always have clear
visions, missions and objectives; the latter rarely undergoes changes, and if a change occurs, it is certainly necessary.
The existence of risk management is reflected in innovation and the courage to take risks, attention to detail,
orientation to results, orientation to the team, aggressiveness and stability can prevent fraudulent financial reporting.
To that end, it shows that risk management has an influence on the prevention of fraudulent financial reporting
(Ahmed et al., 2018; Anggrayni & Nasution, 2021; Chariri, Bukit, Eklesia, Christi, & Tarigan, 2018; Geriesh, 2003;
Indrawan, Wayan, & Komang, 2021; Judge & Robbins, 2017; Novianto et al., 2021; Sari & Ratnawili, 2021; Tunggal
et al., 2010).
The results of hypothesis testing have shown that the t-count value of 2.098 > t-table (1.96), the p-value is 0.037,
which is > 0.05, and the path coefficient value is 0.287. Therefore, implementing good corporate governance is proven
to affect the quality of financial reporting. Establishing good corporate governance in SOEs must pay attention to
principles that include transparency, accountability, responsibility, independence and fairness (Nur’ainy, Nurcahyo,
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Sri Kurniasih, & Sugiharti, 2013). Government theory states that the process of managing activities properly and
correctly is carried out by companies in distributing strong services to the community. The manager (agent) in the
implementation of activities must minimize conflicts of interest to effectively present the appropriate financial
statements requested by shareholders (principal). This finding shows that the implementation of good corporate
governance affects the quality of financial reporting (Klai & Omri, 2011; Nuraini, Hermawan, Hubeis, & Panjaitan,
2015; Nurdiniah & Pradika, 2017; Seow et al., 2020; Zielonka et al., 2017).
The hypothesis testing shows a t-count value of 1.851 (> t-table of 1.96), the p-value is 0.066 (> 0.05), and the
path coefficient value is 0.187. Therefore, the effectiveness of the internal audit function has effect on the quality of
financial reporting. Based on respondents' answers, the effectiveness of internal audit functions were in the excellent
category, and the effectiveness of internal audit functions are demonstrated through audit quality, professional
capabilities of internal auditors and through organizational settings (Amar, Chen, Gavious, & Weihs, 2021; Hansen,
2010). These data show that the internal audit function of SOEs in Indonesia is very effective. Audit theory is
necessary because of the needs of people who can help manage other people's properties. Thus, companies deserve to
enlist the help of auditors to check the loyalty of company managers.
Based on respondents' answers to the indicators of internal auditors' professional capabilities, one of them
indicates that the internal auditor does not have full certification. This finding shows that the internal auditor has not
fully understood the internal audit process. Consequently, the effectiveness of the internal audit function has effect on
the quality of financial reporting. In this case, the internal auditor needs to have a certification from the Functional
Office of the Auditor (JFA), because it shows the competence of the internal auditor.
The findings of the study are supported by the results of interviews conducted with the Director of Finance and
the Head of the Accounting Sub Department which states that internal auditors do not yet fully have the certification
of the Auditor Functional Position (JFA), because of the difficulty in obtaining this certificate. Often, mutations that
occur in employees in the SPI section who are being given audit training cannot provide maximum results in audit
training. Internal auditors perceive that examining financial statements by external auditors will be more detailed.
On the basis of the above problems, situations that affect internal audit functions have no effect on the quality of
financial reporting. Thus, researchers suggest the following: 1) Internal auditors need to obtain certification to
demonstrate their competence (Dien Bard, Hindler, Gold, & Limbago, 2014; Riupassa, Isranuri, Bahriun, & Tugiman,
2011); 2) Employees should be motivated to undertake audit training without coercion. In addition, company
leadership should not transfer employees in the SPI section who are participating in audit training because audit
training conducted by internal auditors is not optimal (Gliezner, 1988). Employees must be motivated to attend
training (Noe, 2017). The support of the supervisor will speed up the training transfer process in both knowledge and
skills. Internal auditors should not rely on external auditors in examining detailed financial statements, because
internal auditors must have the ability (competence) to review detailed financial statement information (Laila, 2017).
Audits conducted internally should comply with company and government policies (Grace & Sukrisno, 2017). Based
on the above, the effectiveness of the internal audit function has effect on the quality of financial reporting (Astuti,
Zuhrohtun, & Kusharyanti, 2015; Harahap, Suriani, & Rosmita, 2017; Johl, Johl, Subramaniam, & Cooper, 2013;
Pranata & Laela, 2020; Surianti, 2021).
Hypothesis testing that has been done produces the following: t-count value (4.818) > t table (1.96), the p-value
is 0.000 (< 0.05), and the path coefficient value is 0.482. Therefore, preventing fraudulent financial reporting affects
the quality of financial reporting. This finding means that increasing the prevention of false financial reporting also
improves the quality of financial reporting.
Preventing fraudulent financial reporting is an attempt to fend off people who could potentially commit fraud in
financial reporting. Based on respondents' answers, preventing false financial reporting obtained by the category is
quite good. Preventing false financial reporting is created through a control environment, opportunity identification
and opportunity assessment. These data show that the prevention of false financial reporting in SOEs in Indonesia is
701
good (Aksan, Setiawan, & Gantyowati, 2019; Ismail & Yuhanis, 2019; Jari & Theresa, 2017; Paranoan, Roreng,
Tandirerung, & Tandungan, 2018; Priantara, 2013). The results of this study also strengthen the theory of Cressey’s
Fraud Triangle, where the cause of fraud is the presence of pressure, opportunity and justification (rationalization).
Fraud prevention can be achieved using the Fraud Triangle theory by reducing pressure, opportunities and
justification (Setiawan, 2018). Respondents' answers to the environmental control statements on top management
commitment indicators are in the fairly good category. This proves that SOEs in Indonesia take responsibility for the
company's risk management activities, internal control functions, preventing fraudulent financial reporting, the
process of appointing and dismissing internal and external auditors, and conducting investigations into fraudulent
activities.
In addition, regarding the indicators of financial capability, SOEs in Indonesia have opportunities to obtain
loans/credit from banks; the company's cash is able to support expected profit growth, and excess debt is not caused
by uncollected corporate receivables. Thus, the overall control environment can support the prevention of false
financial reporting. Respondents' answers to opportunity identification statements on weak control are in the fairly
good category. This proves that the false financial reporting that occurs is not caused by the cooperation of some
parties to enjoy profits. Thus, identifying the opportunities to commit fraud can support the prevention of fraudulent
financial reporting. Respondents' answers to the opportunity assessment statements on opportunity investigation
indicators are in the good category. This proves that SOEs in Indonesia have the ability to detect false financial
reporting carried out by management, have the ability to conduct investigations into false financial reporting, have
the freedom to conduct investigations into false financial reporting, and use analytical procedures to detect false
financial reporting. In addition, regarding the indicator of the delivery of financial information, SOEs in Indonesia
present and report all financial information of the company, are involved in detecting irregularities in financial
reporting implemented by the company's management, implement manual systems and procedures that have been
established by the company, use information in financial statements as a basis for decision making, and have confidence
in the reliability of the information submitted in the financial statements. Thus, an overall opportunity assessment
can support the prevention of fraudulent financial reporting.
Preventing false financial reporting is reflected in the control environment; identification of opportunities and
opportunity assessment can improve quality financial reporting. This finding suggests that preventing false financial
reporting has an influence on the quality of financial reporting (Hussain, Rigoni, & Orij, 2018; Khalique, Isa, Nassir
Shaari, & Ageel, 2011; Syahputri, Dalimunthe, Sabrina, & Rahmadhani, 2019).
5. CONCLUSION
The results of the analysis and testing conclude that good corporate governance has an influence on the
prevention of fraudulent financial reporting. Good corporate governance is a guideline in managing a company to
success. The application of good corporate governance in SOEs is reflected in five principles, namely transparency,
accountability, responsibility, independence and fairness, thus enabling companies to prevent fraud in financial
reporting. The effectiveness of the internal audit function has an influence on the prevention of fraudulent financial
reporting. The effectiveness of the internal audit function is the level of achievement of the internal audit
organization's function in carrying out quality examinations through audit quality, professional capabilities of internal
auditors and organizational arrangements. Thus, the effectiveness of the internal audit function is able to prevent
fraudulent financial reporting. The quality of the audit shows whether or not an examination has been done by an
auditor, and the professional ability of internal auditors shows the credibility that must be owned by the auditor in
carrying out his responsibilities.
Risk management has an influence on the prevention of fraudulent financial reporting. Risk management in a
business context is an effort to avoid risk by monitoring the source of risk and tracking and making a series of efforts
to minimize the impact of risk. If you are an entrepreneur, understanding the risk management process is one of the
702
essential skills you must possess. Thus, managing risk can contribute to preventing fraudulent financial reporting.
Implementing good corporate governance has an influence on the quality of financial reporting. Five principles
contained in good corporate governance, i.e., transparency, accountability, responsibility, independence and fairness,
are consistently carried out by SOEs. The effectiveness of the internal audit function has influence on the quality of
financial reporting. This finding is based on interviews with related parties because internal auditors have not
achieved certification of the Auditor Functional Position (JFA) due to the difficulty in obtaining this certificate. Job
transfers occurring in the SPI section regarding employees who are being given audit training often do not achieve
the maximum results in audit training. Furthermore, internal auditors perceive that examining financial statements
will be more detailed if checked by external auditors. Thus, the effectiveness of the internal audit function has
influence on the quality of financial reporting. Risk management has an influence on the quality of financial reporting.
Risk management is reflected in innovation and the courage to take risks, attention to detail, orientation to results,
orientation to the team, aggressiveness and stability in SOEs. Thus, quality financial reporting is crucial, as everyone
is required to have a high work ethic, creativity, innovation, and honesty in implementing strategies to achieve
company goals. Preventing fraudulent financial reporting includes efforts to deter people from potentially committing
fraud in financial reporting, namely through an environment of control, opportunity identification and opportunity
assessment.
Based on the research conducted, it is recommended that internal auditors should obtain audit certification from
the Functional Office of the Auditor (JFA) because it demonstrates competence. The staff in the SPI section being
given audit training should not be transferred first to another part by management because the audit training carried
out by internal auditors is not optimal. Internal auditors should not rely on external auditors to examine detailed
financial statements because internal auditors should have the ability to carry out this task.
Furthermore, this study has not explained all the variables that can affect the prevention of fraud that has an
impact on the quality of financial reporting. Further research should include other variables, e.g., leadership style,
manager religiosity, and competence of internal auditors. Researchers can use the current research as a starting point
to carry out further studies using similar research methods but with different analytical units and samples with the
intention of obtaining the same results (replicability).
Funding: This study received no specific financial support.

Competing Interests: The authors declare that they have no competing interests.
Authors’ Contributions: All authors contributed equally to the conception and design of the study.
Acknowledgement: The authors would like to thank Padjadjaran University and Widyatama University
Indonesia for providing the opportunity and support to gain insights and expertise that were very helpful for
this research.
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RISK MANAGEMENT AND OTHER FACTORS PREVENTING

Economics and Business, Widyatama University, Indonesia.

Table 1. Cases of fraud that occurred in SOEs.

2.3. Risk Management and Preventing Fraudulent Financial Reporting

2.4. Implementation of Good Corporate Governance and Financial Reporting Quality

2.6. Risk Management and Quality of Financial Reporting

2.7. Fraudulent Financial Reporting and Financial Reporting Quality

3. METHODOLOGY AND DATA

3.2. Methodology and Data

Table 2. Characteristics of respondents.

Figure 1. Average answer curve for variables X1, X2 and X3.

Figure 2. Average answer curve for variables Y and Z.

4.1. Validity Test and Reliability Test

4.2. Hypothesis Testing Results

Table 3. Good corporate governance hardness and reliability test.

Table 4. Variable latent validity and reliability test.

Table 5. Summary of structural model test results.

Figure 3. Full standardized coefficients model.

Table 6. Structural model test results.

Table 7. Hypothesis testing results.

Funding: This study received no specific financial support.

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