Association between fraudulent financial reporting, readability of annual reports, and abusive earnings management: A case of Indonesia


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In practice, auditors sometimes have a hard time detecting false financial statements since they only look at the figures on the financial statements. Consequently, they ignore the red flags in the annual reports’ wording. This study aims to analyze how the level of readability of annual reports and abusive earnings management affects fraudulent financial reporting. A total of 240 annual reports from publicly traded industrial businesses were used. The paper used data from the Indonesia Stock Exchange (IDX) and each sampled companies’ official website. A multiple linear regression analysis was used to test the hypotheses. Falsified financial statements are the dependent variable, while annual report readability and abusive earnings management are independent variables. The Dechow F-Score is used to assess whether financial statements are false. The annual report’s readability is assessed using the Flesch Reading Ease, Length, Flesch-Kincaid, and Lasbarhets Indexes. Finally, accrual discretionary and real earnings management are used to uncover earnings management misuse. According to the findings, dishonest earnings management has a significant influence on financial statement fraud. Moreover, abusive earnings management can aid in the detection of falsified financial statements.

Rector Universitas Trunojoyo Madura supported this paper under Grant Number 2285/UN46.3.1/PN/2019. Any and all views, results, conclusions, or recommendations stated in this material are solely those of the author(s) and do not necessarily reflect those of Universitas Trunojoyo Madura. The authors would like to express their gratitude to the Rector of Universitas Trunojoyo Madura for his efforts and cooperation in conducting this investigation.

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    • Table 1. Variable descriptive statistics
    • Table 2. Multiple regression results
    • Conceptualization
      Tarjo Tarjo, Eklamsia Sakti
    • Data curation
      Tarjo Tarjo, Eklamsia Sakti
    • Formal Analysis
      Tarjo Tarjo, Rita Yuliana, Eklamsia Sakti
    • Funding acquisition
      Tarjo Tarjo
    • Investigation
      Tarjo Tarjo
    • Methodology
      Tarjo Tarjo, Prasetyono Prasetyono, Rita Yuliana
    • Resources
      Tarjo Tarjo, Prasetyono Prasetyono, Eklamsia Sakti
    • Supervision
      Tarjo Tarjo, Alexander Anggono, Prasetyono Prasetyono
    • Validation
      Tarjo Tarjo, Alexander Anggono, Rita Yuliana
    • Writing – original draft
      Tarjo Tarjo, Alexander Anggono
    • Writing – review & editing
      Tarjo Tarjo, Alexander Anggono, Rita Yuliana
    • Visualization
      Alexander Anggono, Prasetyono Prasetyono, Eklamsia Sakti
    • Project administration
      Prasetyono Prasetyono, Eklamsia Sakti
    • Software
      Rita Yuliana, Eklamsia Sakti