DETECTING FRAUDULENT FINANCIAL STATEMENTS IN PUBLIC SECTOR

ORGANISATIONS
Ach Maulidi
Tarjo
Anita Carolina

ABSTRACT
The purpose of this research is to examine and analyse the influence of detection strategies
or methods, auditor competency, audit procedure and professional scepticisms on the success
of fraudulent financial statement detection in public sector organization. This research was
conducted in the Supreme Audit Board Republic of Indonesia (BPK RI) in 2013. The samples of
this research were 78 respondents. The sample techniques used in this research was simple
random sampling. The results of this research reveal that the detection strategies or methods,
audit procedure and professional scepticisms have a significant influence on the success of
fraudulent financial statements detection in public sector organizations. Nevertheless, auditor
competency does not influence significantly on the success of fraudulent statement statements
detection in public sector organizations.
Keywords: Detection strategies or methods, auditor competency, audit procedure and
professional scepticisms, fraudulent statement, detection, public sector organization.

1. Introduction
Association of Certified Fraud Examiners/ACFE (2012) defines financial statement fraud
as the intentional, deliberate, misstatement or omission of material facts, or accounting data
which is misleading and, when considered with all the information made available, would cause
the reader to change or alter his or her judgment or decision. Another perspective claims that
fraudulent financial reporting as intent and deception and creative accounting (Nieschwietz,
Schultz, and Zimbelman (2000), Tipgos, 2002).
Recently, the American Institute of Certified Public Accountants (AICPA), in its statement
of auditing standards (SAS) No. 82, refers to financial statement fraud as intentional
misstatement or omissions in financial statements. Rezaee (2012) states that clear definitions of
financial statement fraud are difficult to discern from pronouncement and/or authoritative
statements primary because, until recently, the accounting profession did not use the word fraud
in its professional pronouncement, instead, the terms intentional mistakes or irregularities were
used.
The landscape of fraud has been changed. Traditionally, external auditors, internal auditors, and
criminal investigators play role as combatants. The traditional auditors role has essentially been that of
watchdogs, as opposed to bloodhounds. In the new emphasis, external auditors, internal auditors, and
criminal investigators have contributed to a more watchful eye in financial statement(Silverstone and
Davia 2005).

According to the ACFE (2012), Occupational frauds can be classified into three primary
categories: asset misapproriation, corruption and financial statement fraud. Of these, asset
misappropriations are the most common occuring in 80,7% of the cases as well as the least
costly causing a median loss of $120.000. In contrast, only 7,6% cases involved financial
statement fraud, but those cases had the greatest financial impact with a median loss of $1
million. Furthermore, corruption scemes fell in the middle in terms of both frequency (33,4% of
cases) and median loss ($250.000). A part from that, ACFE also found that the number of cases
can be detected by internal auditor is 14,4% cases. On the other hand, the cases are
discovered by external auditor only 4,0%. Based on this finding, there are several factors that
should be deliberated by external auditor in order to make good results before conducting audit
and investigation.
Macmillan and Creelman (2005) formulate the most pivotal factors, namely detection
method or strategy and auditor proficiency, associated with the success of fraud detection.
Research performed by Muehlmann et al., (2011) showed that auditor skills are increasingly
playing important part of fraud detection and prevention nowadays. In todays automated world,
many corporation and company processes, including public entities, depend on the use of
technological advancement. This transaction allows people committing fraud to exploit
weaknesses in security, control or oversight in business applications to perpetrate their crimes.
However technology can also be a means of combating fraud.
The detection strategies or methods always have a crucial rule in terms of discovering and
investigating frauds as demonstrated by ACFE finding in 2012, which showed that detection
methods used by internal auditor could detect 14,0% of asset misappropriation cases, 14,3% of
corruption cases, and 14,3% of financial statement fraud cases, However for external auditor
methods could detect 3,3% of asset misappropriation cases, 3,3% of corruption cases, and
5,7% financial statement fraud cases.
The report of Indonesia corruption watch (ICW), shows that the number of corruption
cases throughout 2013 was accounted 560 cases. This research is conducted in East Java
Supreme Audit Board because fraudsters/corruptors in East Java are more experienced, have
good tricks to cheat stakeholders, and can be categorized as unforgivable statement from
Abhaham in a national political seminar in office of the International Conference of Islamic
Scholars (ICIS), in Jakarta, Thursday (12/12 last year (Source: BERITASATU.com).
2. Literature review and Hypotheses Development
2.1 Influence of detection strategies or methods on the success of detecting
fraudulent financial statements in public sector organizations
In todays automated world, many corporation and company activities, including public
entities, depend on the use of technological advancement. This leads to the complexity of audit
and the scopes of audit that require the auditor to develop and renew from the traditional
strategies or methods to the effective and efficient ones. Many New Zealand internal auditors
could not detect a material misstatement due to fraud because they just rely on the traditional
methods (Yukerick, 2003).

The studies are related to the detection strategies or methods namely Shelton et al., (2001),
Wilks and Zimbelman (2004), which require the auditor to develop administration checklists to
cue in fraud risk. And Strategy of brainstorming helps auditors to drive the fraud assessment
(Brazel et al ., 2010; Hoffman and Zimbelman, 2009) and Durtschi et al ., (2004), examines the
the effectiveness of the use of the law of Benford ( Benford's law ) to help detection of fraud in
the accountancy data.
H1: Detection strategies or methods has an influence on the success of detecting
fraudulent financial statements in public sector organizations
2.2 Influence of Auditor competency on the success of detecting fraudulent financial
statements in public sector organizations
Competencies are skills that are essential to perform certain tasks. Auditor has to
continually improve their proficiency and the effectiveness and quality of their services (IIAs,
2010). The auditor is concerned with fraud that causes a material misstatement in the financial
statements. Fraudulent financial reporting can be caused by the efforts of management to
manage earnings in order to deceive financial statement users by influencing their perceptions
as to the entitys performance and profitability. Misappropriation of assets involves the theft of
an entitys assets and is often perpetrated by employees in relatively small and immaterial
amounts. However, it can also involve management who are usually more able to disguise or
conceal misappropriations in ways that are difficult to detect (ISA No. 240, 2004).
Auditor should spend a significant amount of time annually on continuing professional
education to obtain reasonable assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. Prior research undertaken by Yuda et al.,
(2013), that describes that auditor competency has a significant influence on fraud detection in
the public sectors. Tjun et al (2010), that states that auditor competency influence significantly
on audit quality.
H2: Auditor competency has an influence on the success of detecting fraudulent financial
statements in public sector organizations
2.3 Influence of audit procedure on the success of detecting fraudulent financial
statements in public sector organizations
Audit procedures and audit programs are one of the most pivotal instruments for
discovering fraudulent financial statements. In performing audit procedures in planning audit,
the examiners/auditors should develop expectations about plausible relationships that are
reasonably expected to exist, based on the examiners/auditors understanding of the entity and
its environment (SAS No 82).
By providing audit procedures, the auditor can efficiently and effectively detect or identify
unusual relationships involving particular accounts that may indicate a material misstatement
due to fraud. Audit procedures conducted during audit may be helpful in identifying the risks of
material statement due to fraud of error mainly because of guidance provided by them.
H3: Audit procedure has an influence on the success of detecting fraudulent financial
statements in public sector organizations
2.4 Influence of professional scepticism on the success of detecting fraudulent financial
statements in public sector organizations
In accordance with ISA (UK and Ireland) 200, the auditor should maintain professional
scepticism throughout the audit, recognizing the possibility that a material misstatement due to
fraud could exist, notwithstanding the auditors past experience of the honesty and integrity of

the entitys management and those charged with governance. Where response to inquiries of
managements or those charged with governance are inconsistence, the auditor shall investigate
the inconsistencies (ISA 240).
Auditor has a pivotal responsibility to implement professional scepticism when they are
conducting audit in order to result in satisfactory outcome. Examiners should not assume that
the number of information given by managements of an organization is correct based on the
standards prevailing in that area. If auditor is more scepticism, it will lead to increase the
number of cases (fraud) that can be detected during the audit. Prior study related to this
concern is Beasley et al., (2001).
H4: Professional scepticism has an influence on the success of detecting fraudulent
financial statements in public sector organizations

3. The Method of Research

The population of this research is National Auditors of Indonesia (Supreme Audit Board).
The sampling technique used in this research was simple random sampling with 78
respondents. The method to analyse data in this research was multiple regressions analysis
with the significant level 5%.
4. Finding and Discussion
Table 2.1
The Results of Testing Hypotheses
Variables
X1 (Detection Strategies or
Methods)
X2 (Auditor Competency)
X3 (Audit Procedure)
X4 (Professional scepticism)

Coef.
Regression
-0, 245

Sig.

Decision/Result

-2, 427

0, 018

Significant

0, 029
0,256
0,315

0, 379
2,423
3,520

0, 706
0,018
0,001

Not significant
Significant
Significant

4.1 Influence of Detection Strategies or Methods to the Success of Detecting Fraudulent

Financial Statements in Public Sector Organizations
Based on the calculations by the software SPSS 17.0 for windows, it obtains t-count at 2,427 while the t-table at 1, 665. So t - count for detection strategies and methods < t - table
and sig. 0, 018 < 0, 05. This result means that the variable of detection strategies and
methods partially has a significant influence on the success of detecting fraudulent financial
statement in public sector organizations. So, the first research hypothesis is accepted.
The negative value of coefficient regression [-0,245] indicates that there is a negative
influence between independent and dependent variables. This means that detection
strategies or methods used by National External Auditor (BPK RI) cannot detect overall
financial statement frauds occurred in the public organizations or entities.

This study supports the results of research conducted by ACFE (2012) stating that internal
auditors have better strategies than external auditor, where are revealed by the number of
cases can be detected by both auditors. This concern mainly occurs because external
auditors, when they are performing audit, lack understanding and knowledge in terms of
audited entity, complexity of audit and audit scopes.
This finding also parallels with other studies demanding external auditor to develop, renew,
and improve the traditional methods in order to result satisfactory audit. Those studies
include studies piloted by Shelton et al., (2001), Wilks and Zimbelman (2004), which require
the auditor to develop administration checklists to provide sign in fraud risk. Brainstorming
strategy helps auditors to drive the fraud assessment (Brazel et al ., 2010; Hoffman and
Zimbelman, 2009) and Durtschi et al ., (2004), examines the effectiveness of the use of the
Benford's law to help detection of fraud in the accountancy data.
Detection strategies or methods influence negatively to the success of detecting fraudulent
financial statement in public sector organization because the majority of respondents
(auditors) had not ever acquired further specific training and professional education and
only 13 respondents or 10,3% of the total respondents who had ever experienced those
ones. To develop and renew detection methods not only based on mere intuition but also
professional education and training to avoid confusions when the auditors face
unpredictable and unexpected cases.

4.2 Influence of Auditor Competency to the Success of Detecting Fraudulent Financial

Statement in Public Sector Organizations
Based on calculations by the software SPSS 17.0 for windows, it obtains t-count at 0,379
while the t-table at 1, 665. So t - count for auditor competency > t - table and sig. 0, 706 < 0,
05. This result means that the variable of auditor competency partially does not has a
significant influence on the success of detecting fraudulent financial statement in public
sector organization. So, the second research hypothesis is not accepted.
This result suggests that the competency of East Java Supreme Audit Board auditors
should be improved. This study does not support and parallel with other researches such
as Yuda et al., (2013), described that auditor competency has a significant influence on
fraud detection in the public sectors. Tjun et al (2010), stated that auditor competency
influence significantly on audit quality.
According to the data obtained shows that only 10 respondents or 12,8% of the total
respondent who are experiencing in terms of becoming government auditor, and 23
respondents or 29,5% of the total respondents are dedicating their time for audit above 11
years in this job. In the sharp contrast, most of East Java Supreme Audit Board auditors
graduate from bachelor degree (62 respondents or 79,5% of the total respondents) and
respondents are educated from master degree only 16 people or 20,5% of the total

populations. Furthermore, only 13 auditors or 10,3% of the total auditors had ever gained
further professional education and training. This situation (a significant gap between
auditors in terms of formal education and further professional training) triggers no influence
between the auditor competency and the success of detecting fraudulent financial
statements in public sector organizations.
4.3 Influence of Audit Procedure to the Success of Detecting Fraudulent Financial
Statement in Public Sector Organizations
Based on the calculations by the software SPSS 17.0 for windows, it obtains t-count at 2,423 while the t-table at 1, 665. So t - count for detection strategies and methods < t - table
and sig. 0, 018 < 0, 05. This result means that the variable of audit procedure partially has a
significant influence on the success of detecting fraudulent financial statements in public
sector organizations. So, the third research hypothesis is accepted.
This study supports the result of research piloted by Wilks and Zimbelman (2004)
concluding that good audit procedure plans increase the result of fraud detection and
prevention occurred in that organization. The research conducted by Trang (2011) also
states that the number of accurate audit evidences collected by auditor is based on audit
procedure used by examiners. Effective antifraud programs should prevent and detect all
of fraud types (Rezaee et al., (2012).
This study also parallel with another one conducted by Burnaby et al., (2011) describing
that the most effective audit program in terms of performing audit can review the number of
transactions happened in that entity. Based on the fraud risk assessment, an anti-fraud
programs and procedures ensure that there are an adequate controls in place to detect a
material misstatement occurred by fraud of error.
The obtained data shows that there are many East Java Supreme Audit Board auditors who
are experiencing in terms of becoming government auditor, and 23 respondents or 29,5%
of the total respondents are dedicating their time for audit above 11 years in this job. If
auditors have a wide range of experience, they will have good skills, knowledge and
insights to tackle challenging and complicating cases.
4.4 Influence of Professional Scepticism to the Success of Detecting Fraudulent
Financial Statement in Public Sector Organizations
Based on the calculations by the software SPSS 17.0 for windows, it obtains t-count at 3,520 while the t-table at 1, 665. So t - count for detection strategies and methods < t - table
and sig. 0, 001 < 0, 05. This result means that the variable of professional scepticism
partially has a significant influence on the success of detecting fraudulent financial
statements in public sector organizations. So, the forth research hypothesis is accepted.

This research supports and parallel with the result of studies piloted by Lutchenn et al.,
(2011), Arnigier (2006), Bryghtmaen et al.,(2005) and Sonben and Aicher (2009). These
studies require the auditor to implement professional scepticism for the success of
combating fraudsters. Apart from that, this study also strengthens Shultzs funding (2001)
stating that auditor scepticism has important part of discovering a material misstatement
during performing audit.
The collected data shows that most of respondents claimed that professional scepticism
has strong impact on collecting adequate and relevant data. To demonstrate that financial
statements issued by an organization are free from a material misstatement, auditor should
carefully analyse managements opinions and explanations to proof the accuracy of
information.

5. Conclusion
1. Detection strategies and methods partially have a significant influence on the success of
detecting fraudulent financial statement in public sector organization.
2. Auditor competency partially does not have a significant influence on the success of
detecting fraudulent financial statement in public sector organization.
3. Audit procedure partially has a significant influence on the success of detecting
fraudulent financial statement in public sector organization.
4. Professional scepticism partially has a significant influence on the success of detecting
fraudulent financial statement in the public sector organization.