Fraudulence detection in financial reporting by pentagon approach using f score model in banking and financial sector companies on ho chi minh city stock exchange

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIET NAM BANKING UNIVERSITY OF HO CHI MINH CITY FACULTY OF ACCOUNTING AND AUDITING  - - GRADUATE THESIS FRAUDULENCE DETECTION IN FINANCIAL REPORTING BY PENTAGON APPROACH: USING F-SCORE MODEL IN BANKING AND FINANCIAL SECTOR COMPANIES ON THE HO CHI MINH CITY STOCK EXCHANGE Instructor: MAcc Mai Hong Chi Implementer: Nguyen Thi Quyen Linh Student ID: 030805170355 Class: HQ05-GE12 Batch: HO CHI MINH CITY, YEAR 2021 ABSTRACT This graduate thesis aims to examine whether five elements of pentagon fraud theory regarding pressure, opportunity, competence, arrogance, and rationalization - five of which are developed into thirteen independent variables, namely, Fiancial Target, Financial Stability, External Pressure, Institutional Ownership, Company Growth, Liquidity, Inefective Monitoring, Nature of Industry, Change of Auditor, Total Accruals, Quality of external auditor, Change of directors, and CEO Picture – have a significant influence on fraudulent financial reporting in banking and financial sector companies listed on Ho Chi Minh Stock Exchange (HSX) during five-year period from 2016 to 2020 Besides, this thesis uses F-score model as a tool of estimating the risk level of fraudulent financial reporting, which showed as an independent variable The population in this thesis are the whole banking and financial sector companies listed on Ho Chi Minh Stock Exchange from 2016 to 2020 and this thesis is conducted by quantitative method with secondary data is used; besides, with purposive sampling technique, there are 90 samples in observation Aside from that, logistic regression analysis is used in this thesis as a data analysis method and the author uses SPSS 20 software as a data processing tool The results expressed that external pressure and institutional ownership have a positive effect on fraudulent financial reporting and ineffective monitoring has a negative effect on fraudulent financial reporting, whereas, the rest of independent variables are mentioned have no effect on fraudulent financial reporting From this optained results, the author highly recommends for corporates and auditors in truly disclosing information on audited financial reporting Keywords: Fraud Pentagon, Fraudulent financial reporting, Pressure, Opportunity, Rationality, Competence, Arrogance, F-score model ASSURANCE The author commits that this graduate thesis: “Fraudulence Detection In Financial Reporting By Pentagon Approach: Using F-Score Model In Banking And Financial Sector Companies On The Ho Chi Minh City Stock Exchange” has been performed by the endeavor of the author and the enthusiastic guideline of Macc Mai Hong Chi over the past time Numerical data and research results in this thesis are honest and fully uncopied or disused for any similar research subject If it’s spotted that there is a copy of the research result from other research subjects, I will totally take responsibility for this thing Thu Duc city, June 27th , 2021 The author Nguyen Thi Quyen Linh ACKNOWLEGEMENTS The author would like to expression the deepest and most sincere gratitude to my scientific instructor, Macc Mai Hong Chi, have enthusiastic and conscientious tutorials to the author’s thesis over the course of performing this graduate thesis Then, the author would like to send my sincere thanks to the collective of lecturers at Banking University of Ho Chi Minh city in general, and especially, lecturers in the Faculty of Accounting and Auditing in particular, who have taught the author over the past years since I did the reseach paper in the first time Thanks to their teaching lessons, the author has just accumulated and applied these useful knowledge for the author’s thesis Ultimately, the author would like to express the the sincerest thanks to the whole my family members, those who always stands by the author, encourages the author, and facilitates the author all respects over the period; thereby, the author has just finalized this graduate thesis Respectfully Thu Duc city, June 27th, 2021 The author Nguyen Thi Quyen Linh CONFIRMATION OF THE INSTRUCTOR ……………………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………………… INSTRUCTOR’S SIGNATURE Macc MAI HONG CHI TABLE OF CONTENTS Contents ABSTRACT ASSURANCE ACKNOWLEGEMENTS CONFIRMATION OF THE INSTRUCTOR ENUMERATION OF DIAGRAM AND TABLE AND PICTURE 10 CHAPTER 11 1.1 THE NECESSITY OF THE STUDY 11 1.2 RESEARCH OBJECTIVES 12 1.3 RESEARCH QUESTIONS 13 1.4 RESEARCH METHODOLOGY 13 1.5 SUBJECT AND SCOPE OF THE STUDY 13 1.5.1 Subject 13 1.5.2 Scope 13 1.6 CONTRIBUTIONS OF THE STUDY 13 1.7 THE INNOVATIVE 14 1.8 THESIS STRUCTURE 14 CHAPTER 15 2.1 RELATED CONCEPTS 15 2.1.1 Fraud 15 2.1.2 Financial reporting fraudulence 16 2.1.3 Pentagon fraud theory 18 2.2 THEORETICAL FRAMEWORK 22 2.2.1 Effects of Pressure on Fraudulent Financial Reporting 22 2.2.2 Effects of Opportunity on Fraudulent Financial Reporting 24 2.2.3 Effects of Rationalization on Fraudulent Financial Reporting 26 2.2.4 Effects of Competence or Capability on Fraudulent Financial Reporting 28 2.2.5 Effects of Arrogance on Fraudulent Financial Reporting 29 2.3 PREVIOUS RESEARCH 31 CONCLUSION OF CHAPTER 37 CHƯƠNG 38 3.1 RESEARCH FRAMEWORK 38 3.2 RESEARCH METHOD 39 Data collection method: Quantitative research 39 3.3 RESEARCH MODEL: F-SCORE MODEL 39 3.4 HYPOTHESIS DEVELOPMENT 41 3.4.1 Pressure is proxied by six following independent variables: 41 3.4.1.1 Financial target (ROA) 41 3.4.1.2 Financial stability (FINST) 43 3.4.1.3 External pressure (LEV) 45 3.4.1.4 Institutional ownership (INST) 47 3.4.1.5 Compny growth (CG) 48 3.4.1.6 Liquidity (CR) 49 3.4.2 Opportunity is proxied by two following independent variables: 51 3.4.2.1 Ineffective monitoring (BDOUBT) 51 3.4.2.2 Nature of industry (REC) 52 3.4.3 Rationality is proxied by three following independent variables 54 3.4.3.1 Change of auditor (AUCHANGE) 54 3.4.3.2 Total accruals (TATA) 56 3.4.3.3 Quality of external auditor (BIG) 57 3.4.4 Competence is proxied by following independent variable: 59 3.4.4.1 Change of directors (DCHANGE) 59 3.4.5 Arrogance is proxied by following independent variable: 60 3.4.5.1 CEO Picture (CEOPIC) 60 3.5 DADA ANALYSIS METHOD 62 3.5.1 Descriptive data 62 3.5.2 Logistic Regression Analysis 64 3.6 OPERATIVE DEFINITION OF VARIABLES AND MEASURES 68 3.4.1 Dependent variable (Y) 69 3.4.2 Independent variables (X) 70 3.7 DATA COLLECTION 72 3.7.1 Research design 72 3.7.2 Research process 73 3.7.3 Data processing tool 75 CONCLUSION OF CHAPTER 76 CHAPTER 77 4.1 RESULT DISCUSSION 77 4.1.1 Descriptive analysis for variables with ratio scale 77 4.1.2 Descriptive analysis for variables with nominal scale 80 4.1.3 The goodness of fit test 81 4.1.4 Overall Model Fit 81 4.1.5 Nagelkerke R Square 82 4.2 HYPOTHESIS TESTING DISCUSSION 83 4.2.1 Hypothesis testing 83 4.2.2 Hypothesis testing discussion 85 CHAPTER 5: 89 5.1 CONCLUSION 89 5.3 SUGGESTION 89 5.2 LIMITATION 93 ENUMERATION OF DIAGRAM AND TABLE AND PICTURE Diagram Diagram 1.Research framework Diagram Hypothesis development Table Table Overview of previous researches Table Description of dependent variable and independent variables Table Descriptive Statistics with ratio scale Table 4.1 Descriptive Statistic with nominal scale Table 4.2 Descriptive statistic with nominal scale Table Descriptive Statistics with nominal scale Table The goodness of fit test Table Overall Model Fit Table7 Nagelkerke R Square Table Hypothesis testing Table 8.2 Hypothesis testing Picture Picture Crowe's Fraud Pentagon financial resource, in order to finance their operations, if these liabilities are fully disclosed would be greatly useful to assess whether the companies pay off when they come due However, in case, the companies have not enough financial resources to finance their financial projects, researches, capital expenditures, their operations, it is mandatory that the companies have to borrow liabilities from outside parties in this situation; but, audited financial reportings are the companies’ faces, in case, there comes audited financial reportings in a bad expression of financial situation, it more likely turns hard to this need; however, if audited financial reporting is expressed well in financial situation and proit ratio performance, as a consequence that the investors most likely tend to invest in these companies since these companies are much more likely expected to repay what the companies received from them Therefore, this thing causes a heavy pressure on management and tends to commit fraud on audited financial reporting To recommend, the author would like to suggest intended users that when infrmation users may have an investing intention in these companies, they themselves have to self assess the financial situation of companies by reading audited financial reportings and examining whether there may be an instability or unreasonability from the liabilities versus other components in financial reportings or they themselves may find out financial experts to help in this problem The author also suggests the companies themselves should completely disclose the whole liabilities to limit economic damages from outside parties and well operate to payback these liabilities To the third party, audit firms, participates in aufiting financial reportings of these client, the author also suggest that when audit liabilities, they need to definitely focus on and reasonably consider the risks likely to occur relating to liabilities and should the best to publicize the whole liabilities Institutional Ownership is a financial indicator and developed from the element Pressure in Pentagon Fraud Theory by the amount of shares owned by institutions divide common shares outstanding Institutional Ownership turns into pressure towards the management of these companies because they have to their best to not lose these investors, so in a hardship situation, the management may choose the way of information manipulation by beautify the information on financial reportings, results in commiting fraudulent financial reporting For suggestions with this hypothesis, the author herself would like to highly recommend that Institutional Ownership shouldn’t materially account for total outstanding shares, because this thing likely causes larger pressure on management burden and may lead to committing behaviours, if they have a big stitutional ownership, they should have made effective operative budget or project or plan in preceding way to make decisions of letting a big amount of shares owned by institutions, this leads to the thing that companies themselves have to employ well managerial accountants to help them to think out somewhat reasonable estimates from the past till the future ahead of the operations of the busisness To the third party, audit firms, they ought to consider this hypothesis as an important clue to focus on the likely aspects which may make management themselves somewhat commit fraudulent financial reporting Ineffective monitoring is an indicator and developed from opportunity element of Pentagon Fraud Theory This hypothesis means that the number of independent commissioners in a Board of Commissioners, which means that when the presence of these components comes, there will go up the effectiveness in management supervision in preventing fraudulent financial statements, because independent commissioners come from outside companies are not relating to the operations of the companies In this study, this hypothesis is tested in a negative result though it has a fluence on fraudulent financial reportings Therefore, the author highly recommend the companies should have these characters in their board of commissioners and these people have to be employed under the transparent publicity towards all people in the company on the basis of original document of independent commissioners’ profile To the third party, audit firms, the author also highly recommend that they should focus on this indicator but not much in this sector, because of its negative result in this study; however, they ought to be somewhat considered and this information has to be displayed on audited finencial reportings to create a durable belief at intended users Audit firms are the most important party to make financial information stay true and reasonable on audited financial reportings, which most likely matters with intended users, those who usually rely on the financial information on audited financial reportings to make their best decisions, which is like a trustworthy channel to send their investing belief that may bring them an expected paybacks Therefore, the professional ethics towards every auditors are extremely crucial in order for them to well complete their role as a professional flair of a independent party From this, audit firms have to take responsibilities with reasonable recruiting policy which compy with the current set of rules of state towards auditing, such as: auditors have to have the background of graduating accounting and auditing faculty from universities, they have to finalize professional certificates, namely CPA, ACCA,… the auditor directs to display financial information on final audited financial reportings have to be sanctioned from Ministry of Finance And the author also highly recommend that auditors should experience moral tests or be put under rigid track as often Besides, the author also highly recommend that auditing price should be suitable with the workload of audit on the reasonable estimated basis and this should be publicize in a clear way in order to this thing couldn’t be the large obstacle in auditing clients and it should not considered as revenue objective to falsify information which is deprived from client’s intention Professional legislation should be made in a serious way to limit this fraudulent financial reportings, and Ministry of Finance is considered as a vital sanction in checking the quality of external audit firms every year and if audit firms violate professional responsibilities, they have to be publicize to be as mirrors for other professional firms following and avoiding 5.2 LIMITATION There are four limitations regarding this study, as follows: Firstly, this study uses F-score model as a tool of measuring the risk level of fraudulent financial reporting and presents F-score as a dependent variable, namely fraudulent financial reporting, wheares there are some other models which are also more likely applied for this study Then, this study uses 13 independent variables, namely: Financial target, Financial stability, External pressure, Institutional Ownership, Company Growth, Liquidity, Ineffective Monitoring, Nature of Industry, Change in Auditor, Total Accruals, Quality of External Auditor, Change of directors, and CEO picture, whereas, there are many other independent variables, which may have influence on fraudulent financial reporting Next, this study uses secondary data on audited financial reporting listed on Ho Chi Minh Stock Exchange with 18 companies over five years from 2016 to 2020, turning into 80 samples, whereas, this study can be expanded to other domestic Stock Exchange Eventually, the scope of this study involves banking and financial sector, whereas, this study can be expanded to other sectors BIBLIOGRAPHY [1] A A Arens, Elder Randar J., M S Beasley, and C E Hogan, Auditing and Assurance Services: An Integreted Approach 2014 [2] J Chen, “Fraud Definition,” 2021 https://www.investopedia.com/terms/f/fraud.asp (accessed Jun 29, 2021) [3] My Accounting Course, “What is Fraudulent Financial Reporting? - Definition | Meaning | Example,” 2021 https://www.myaccountingcourse.com/accountingdictionary/fraudulent-financial-reporting (accessed Jun 30, 2021) [4] M., K., and A Nurkhin, “What Determinants of Academic Fraud Behavior? 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Arrogance, F- score model ASSURANCE The author commits that this graduate thesis: ? ?Fraudulence Detection In Financial Reporting By Pentagon Approach: Using F- Score Model In Banking And Financial Sector. .. determination of fraudulent financial reporting causes by using pentagon theory on manufacturing companies in indonesia (Taufiq Akbar 2017), Pentagon Fraud Analysis in Detecting Fraudulent Financial