Board Characteristics and Financial Statement Fraud: Evidence from Indonesian Public Companies

Abstract

The ineffectiveness of the corporate governance structure as a monitoring mechanism is identified as one of the causes of financial statement fraud. This implies that the implementation of good corporate governance can mitigate financial statement fraud. In the governance structure, the board plays an important role in supervising the company's activities. Effective oversight helps the company to conduct its business properly and prevent the perpetration of fraud. The aim of this study is to identify weather board characteristics can mitigate financial statement fraud in public companies in Indonesia. This study investigates financial statement fraud with the financial shenanigans’ ratios: Days' Sales Outstanding Growth (DSOG), Cash Flow from Operating Divided by Net Income (CFFONI) and Accounts Receivable Divided by Sales (ARSAL), while board characteristics is measured by board size, board independence, and frequency of board meetings. This study was analyzed using multiple linear regression methods to test three hypotheses and three measures of financial statement fraud. The data processed and analyzed are derived from the annual reports of public companies in the non-financial sector industry listed on the Indonesia Stock Exchange (IDX) with a total sample size of 733. The study findings suggest that board characteristics play an important role in conducting effective oversight to reduce the likelihood of financial statement fraud.