Abstract
Background: Financial statement fraud, asset misappropriation and corruption remain persistent challenges in Indonesia, Malaysia and Singapore. The basic materials sector, characterised by high-value assets and substantial financial flows, is particularly vulnerable to such practices. As a key supplier of raw materials for multiple industries, firms in this sector face heightened incentives for financial statement manipulation, especially under conditions of economic pressure or weak corporate governance.
Aim: This study examines the influence of the Fraud Hexagon elements (pressure, opportunity, rationalisation, capability, arrogance and collusion) on the likelihood of financial statement fraud, while also exploring the moderating role of national cultural values, specifically uncertainty avoidance.
Setting: Financial statement fraud among basic materials companies in Indonesia, Malaysia and Singapore spanning the years 2021 to 2023.
Method: Utilising a dataset of 216 firm-year observations from Indonesia, Malaysia and Singapore spanning the years 2021 to 2023, the study employs a panel data regression model with moderated regression analysis.
Result: The findings indicate that pressure and capability are significant predictors of fraudulent financial reporting. Moreover, uncertainty avoidance significantly moderates the relationships between pressure and collusion and financial statement fraud, strengthening their impact.
Conclusion: These results suggest that both organisational and cultural factors shape fraudulent behaviour, emphasising the importance of culturally responsive anti-fraud frameworks and governance mechanisms.
Contribution: This study contributes to fraud theory by integrating behavioural, organisational and cultural dimensions, offering valuable insights for auditors, regulators and policymakers operating in culturally diverse contexts.
Keywords: cultural; financial statement fraud; fraud hexagon; Southeast Asia; uncertainty avoidance.
Introduction
Financial fraud continues to pose a significant threat to organisational sustainability in both emerging and developed economies. In Southeast Asia, particularly in Indonesia, Malaysia and Singapore, financial statement fraud (FSF), asset misappropriation, and corruption remain persistent challenges within the corporate sector. These issues not only erode investor confidence and corporate governance standards but also present systemic risks to national economies (Xu, Wenlong & Siyu 2025). Recent evidence continues to show that fraud remains a significant issue despite improvements in governance and internal control systems. According to the Association of Certified Fraud Examiners (ACFE) global report, occupational fraud persists worldwide, with organisations estimated to lose approximately 5% of their annual revenue to fraud, indicating that fraud risk remains pervasive across sectors (ACFE 2024). However, in terms of financial impact, FSF represents a serious threat to the stability of financial markets, necessitating effective detection mechanisms to prevent substantial investor losses and protect corporate reputations (Li, Yen & Wang 2024). This pattern is mirrored across the region. In Malaysia, financial fraud resulted in cumulative losses exceeding USD 3.6 billion annually between 2018 and 2021 (Dorros 2020). According to PricewaterhouseCoopers’ 2020 survey, 24% of Malaysian companies reported losses greater than USD 1 million, while the overall incidence of fraud increased to 43% in 2020 from 41% in 2018. Similarly, Singapore witnessed a sharp 64.5% increase in reported fraud cases in 2023 compared to the previous year, although the total financial losses declined slightly to SGD 334.5 million (Darisman & Ananda 2023).
Among industrial sectors, the basic materials sector is particularly susceptible to fraudulent activities. As a key supplier of raw materials to various industries, firms in this sector often manage high-value assets and large-scale financial flows (Hakim et al. 2024). These characteristics create greater opportunities and incentives for financial statement manipulation, especially under conditions of economic pressure or weak corporate governance (Rozi & Munari 2024). Several high-profile cases illustrate this vulnerability. PT Waskita Beton Precast, a major Indonesian construction company, was involved in a large-scale corruption scandal between 2016 and 2020, resulting in state losses of approximately IDR 2.5 trillion. PT Krakatau Steel reported substantial financial irregularities during the development of its Blast Furnace Complex, with losses exceeding IDR 6 trillion. Similarly, PT Timah Tbk – one of the world’s largest tin producers – faced legal proceedings for financial misstatements and operational inefficiencies, leading to significant erosion of shareholder value (Soda 2016). These cases underscore the critical need for robust fraud risk management, particularly in sectors characterised by volatile assets and liabilities that are prone to manipulation.
The dynamics underlying FSF have evolved beyond traditional explanatory models. Early frameworks, such as the Fraud Triangle proposed by Cressey (1953), identified pressure, opportunity and rationalisation as the primary drivers of fraudulent behaviour. Subsequently, the Fraud Diamond Model introduced by Wolfe and Hermanson (2004) incorporated capability as a critical fourth element. The Fraud Pentagon, developed by Marks (2012), further expanded the model by adding arrogance, emphasising the influence of executive hubris. Building on these earlier frameworks, the Fraud Hexagon Theory proposed by Vousinas (2019) introduces collusion as a sixth dimension, recognising that coordinated fraudulent schemes involving multiple actors pose greater risks and complexities. Together, the six elements of the Fraud Hexagon – pressure, opportunity, rationalisation, capability, arrogance and collusion – provide a more comprehensive framework for understanding and detecting FSF (Achmad, Ghozali & Pamungkas 2022; Honesty, Honesty & Setiawan 2024).
In addition to internal organisational factors, cultural context, particularly uncertainty avoidance, plays a significant role in shaping fraudulent behaviour. As conceptualised by Hofstede (2011), uncertainty avoidance reflects a society’s tolerance for ambiguity and its tendency to implement formal rules and structures to reduce uncertainty. In cultures characterised by high uncertainty avoidance, managers may adopt risk-averse strategies, including unethical practices such as financial manipulation, to maintain organisational stability and safeguard personal interests (Hasan et al. 2020; Khairani et al. 2024). Empirical evidence suggests that uncertainty avoidance can both suppress and exacerbate fraudulent behaviour, depending on the strength of institutional controls and individual rationalisation processes (Tsalavoutas & Tsoligkas 2021). In high uncertainty-avoidance environments, where mistakes and failures are heavily stigmatised, managers may perceive fraudulent financial reporting as a rational means of avoiding reputational damage, regulatory sanctions, or career setbacks (Hofstade 2020). Accordingly, examining the moderating effect of uncertainty avoidance within the Fraud Hexagon framework is essential to understanding the dynamics of FSF in Southeast Asia, a region marked by strong cultural collectivism and considerable regulatory heterogeneity.
Although numerous studies have analysed the Fraud Hexagon in isolation (Haeronnisa & Isnawati 2024; Nugroho & Diyanty 2022; Suryandari et al. 2023), few have incorporated cultural dimensions as moderating factors. Moreover, prior research has often focused on single-country contexts, thereby limiting the generalizability of findings across regions with differing legal systems, corporate governance structures and cultural environments. This study addresses these gaps by examining the combined effects of Fraud Hexagon elements on FSF, while also exploring the moderating role of uncertainty avoidance. To enhance cross-cultural relevance, the study employs empirical analysis across Indonesia, Malaysia and Singapore, three economically interconnected yet culturally diverse nations. In doing so, this research offers nuanced insights into how organisational and cultural factors jointly shape fraudulent financial reporting, providing practical implications for academics, regulators and corporate policymakers.
This study aims to empirically investigate the influence of the Fraud Hexagon elements (pressure, opportunity, rationalisation, capability, arrogance and collusion) on the incidence of FSF in basic materials companies listed on the Indonesia Stock Exchange (IDX), Bursa Malaysia and Singapore Exchange (SGX) between 2021 and 2023. Furthermore, it examines the moderating effect of cultural factors, specifically uncertainty avoidance, on the relationship between these fraud risk elements and fraudulent reporting practices. By incorporating cultural dimensions into the fraud risk framework, this research contributes to the refinement of fraud theory and the development of more culturally responsive models for detecting and mitigating FSF in the Southeast Asian context.
The study offers both theoretical and practical contributions. Theoretically, it extends existing literature by emphasising the significance of cultural context, particularly uncertainty avoidance, influencing fraudulent behaviour. Practically, the findings provide insights into improving fraud detection mechanisms, strengthening internal audit strategies, and guiding the formulation of regulatory and corporate governance policies. These insights are especially relevant for multinational corporations operating in culturally diverse environments. From a policymaking perspective, the study supports the design of more targeted anti-fraud regulations and governance reforms that address not only organisational vulnerabilities but also broader socio-cultural drivers of FSF.
Theoretical framework and hypotheses
The understanding of fraud motivation has evolved through multiple theoretical models over time. The earliest and most widely recognised framework is the Fraud Triangle Theory, introduced by Cressey (1953), which posits that three factors, pressure (DuHadway et al. 2020; Zhong, She & Ren 2024), opportunity (Upadhyay & Upadhyay 2025) and rationalisation (Bierstaker et al. 2024), jointly contribute to fraudulent behaviour. Financial pressure often drives individuals to seek covert solutions to personal or organisational difficulties, while opportunity arises from control weaknesses or oversight failures. Rationalisation enables individuals to justify their unethical behaviour as acceptable or harmless under the circumstances (Ngọc et al. 2022). Recognising the limitations of this three-factor model, the Fraud Diamond Theory introduced a fourth element – capability – to reflect the idea that not everyone under pressure and opportunity will commit fraud. Only individuals with the necessary skills, authority and confidence are capable of executing fraud successfully (Rustiarini et al. 2019). Building on this, the Fraud Pentagon Theory, proposed by Marks (2012), added arrogance as a fifth factor (Harjati & Reskino 2023). Arrogance is characterised by excessive self-confidence and a disregard for rules or internal controls, leading individuals to believe they are exempt from ethical standards (Misran 2024).
Despite these enhancements, the Fraud Pentagon still fell short in explaining the dynamics of complex, large-scale fraud that often involves multiple perpetrators. Addressing this gap, Vousinas (2019) introduced collusion as the sixth critical element. Collusion refers to the coordinated efforts of two or more individuals to commit and conceal fraudulent acts, thereby circumventing even robust control systems. The Fraud Hexagon Theory identifies six fundamental drivers that contribute to fraudulent behaviour. Firstly, pressure arising from internal or external stressors – such as financial hardship or performance targets – can lead individuals to engage in unethical behaviour. Secondly, opportunity arises from organisational weaknesses or lapses in oversight, providing avenues through which fraud can be committed without immediate detection. Thirdly, rationalisation represents the cognitive justifications that individuals employ to reconcile their fraudulent actions with their self-perception, thereby minimising feelings of guilt or wrongdoing. Fourthly, capability encompasses the skills, intelligence and authority required to exploit opportunities for fraud effectively. Fifthly, arrogance reflects a sense of superiority or entitlement, where individuals believe that rules or ethical standards do not apply to them because of their position or perceived indispensability. Finally, collusion involves the collaborative efforts of multiple actors who conspire to commit and conceal fraudulent activities, often making detection significantly more difficult. Together, these six elements form a comprehensive framework for understanding the multifaceted motivations underlying FSF in modern organisations.
Recent studies (Khairani et al. 2024; Pereira, Vaz & Sá e Silva 2022) underscore the importance of addressing all six elements of the Fraud Hexagon in designing effective fraud detection mechanisms. Financial statement fraud, in particular, is often characterised by complex schemes involving collusion among executives, auditors and other key stakeholders. Such fraud typically manifests through deliberate misstatements in financial records, including improper revenue recognition, overstatement of assets, understatement of liabilities, or the omission of material disclosures (Situngkir & Triyanto 2020). Given the far-reaching consequences of fraudulent reporting, such as diminished investor confidence, regulatory penalties, and potential organisational collapse, it is imperative to deepen our understanding of the underlying motivations driving FSF. Such insights are essential for developing robust, comprehensive and context-sensitive frameworks for fraud prevention and detection.
Financial statements serve as essential communication instruments between companies and their stakeholders, offering critical insights into a firm’s financial performance, position and cash flows. However, when managers or executives intentionally manipulate these reports, FSF occurs (Azzheurova 2024). This form of fraud is defined as the deliberate misrepresentation or omission of financial information intended to deceive stakeholders such as investors, creditors, regulators and the public (Putra & Setyo 2020). Common fraudulent practices include revenue inflation, liability concealment, earnings per share (EPS) manipulation, and falsification of required disclosures. The underlying motivations often stem from pressures to meet financial targets, secure external financing, enhance stock prices or qualify for performance-based compensation schemes.
The implications of FSF are extensive and severe. It misleads stakeholders, undermines the efficiency of capital markets, erodes corporate reputations and often results in significant legal and financial repercussions, including bankruptcy. High-profile cases such as Enron, WorldCom and the more recent 1MDB scandal in Malaysia highlight the devastating impact of fraudulent financial reporting on organisations and national economies. Notably, such fraud frequently originates at the highest levels of corporate leadership, making it particularly difficult to detect through conventional audit procedures. As a result, the presence of strong internal controls, whistleblower mechanisms, independent audit committees and rigorous regulatory oversight is essential for both the prevention and early detection of FSF (Situngkir & Triyanto 2020). Given its complexity and far-reaching consequences, FSF continues to be one of the most formidable challenges in the fields of forensic accounting and auditing, thereby necessitating ongoing research into its drivers and the contextual variables that influence its occurrence.
Uncertainty avoidance is one of Hofstede, Hofstede and Minkov (2010) six cultural dimensions, reflecting the extent to which members of a society feel threatened by uncertainty and ambiguity (Moradi 2024). Societies characterised by high uncertainty avoidance tend to prefer structured environments, strict regulations, formalised rules and clearly defined behavioural norms. In contrast, societies with low uncertainty avoidance are generally more comfortable with ambiguity and display greater flexibility when facing novel challenges (Williams et al. 2024). In organisational contexts, cultures with high uncertainty avoidance prioritise stability, adherence to formal procedures and risk minimisation. This cultural orientation significantly influences management practices, governance structures, and ethical decision-making processes. Specifically, in relation to fraudulent behaviour, uncertainty avoidance can shape how managers respond under conditions of pressure. In high uncertainty avoidance cultures, managers may exhibit greater risk aversion and engage in more cautious decision-making, which could theoretically reduce the likelihood of fraud. However, paradoxically, when faced with intense organisational pressure, these managers may rationalise fraudulent actions as necessary to preserve perceived stability and predictability (Mohanna & Sponem 2020).
Thus, while uncertainty avoidance can serve as a deterrent to opportunistic behaviour, it may also contribute to the likelihood of FSF under extreme pressure or high-performance expectations. Recent research by Khairani et al. (2024) suggests that uncertainty avoidance moderates the relationship between fraud risk factors and actual fraudulent outcomes. For example, in high uncertainty avoidance environments, the influence of pressure, opportunity, or capability on fraudulent behaviour may be amplified, as individuals attempt to prevent negative consequences through unethical means. The relationship between uncertainty avoidance and fraudulent behaviour is therefore complex and highly context-dependent. Understanding this moderating effect is essential for multinational corporations operating across culturally diverse environments, as it informs the development of internal control systems, ethical training programmes and fraud risk management strategies.
Building upon the preceding discussion, this study integrates the Fraud Hexagon model with cultural theory, with a particular emphasis on the moderating role of uncertainty avoidance. It is hypothesised that the six elements of the Fraud Hexagon (pressure, opportunity, rationalisation, capability, arrogance, and collusion) individually influence the likelihood of FSF. The cultural dimension of uncertainty avoidance is expected to moderate these relationships by either strengthening or weakening their effects, depending on a society’s tolerance for ambiguity and risk. By combining organisational behaviour theories with cultural dimensions, this research seeks to offer a more comprehensive understanding of the dynamics underlying FSF within the Southeast Asian context. Specifically, the study focuses on publicly listed companies on the IDX, Bursa Malaysia and the SGX. Based on prior empirical findings and the theoretical foundations adopted, the conceptual framework of this study is illustrated in Figure 1.
Building on established theoretical frameworks of fraudulent behaviour, namely the Fraud Triangle, Fraud Diamond, Fraud Pentagon, and Fraud Hexagon, this study proposes a series of hypotheses to examine the determinants of FSF. Each hypothesis is grounded in robust theoretical reasoning and supported by empirical evidence from prior research. In addition, this study acknowledges the influence of cultural factors in shaping organisational behaviour by incorporating the moderating role of uncertainty avoidance into the research framework. The following subsections present the detailed development of each hypothesis, outlining the logical and theoretical foundations that underpin the proposed relationships.
Financial pressure is widely recognised as a significant driver of fraudulent financial reporting. Theoretically, according to Cressey’s (1953) Fraud Triangle, pressure serves as a critical antecedent to unethical behaviour. Organisations often face substantial expectations from investors, creditors and other stakeholders to demonstrate sustained financial growth and profitability. When legitimate means of achieving financial targets become constrained, managerial pressure intensifies to preserve a facade of success (Adhania, Holiawati & Nofryanti 2024). Under such circumstances, managers may rationalise fraudulent financial reporting as a necessary strategy for organisational survival – aimed at maintaining stakeholder confidence, avoiding financial distress or securing additional funding. Empirical evidence supports this theoretical assertion. Prior studies (Amalia, Yusnaini & Sari 2025; Honesty et al. 2024; Hudayati, Nisa & Sanusi 2022) consistently demonstrate a positive association between financial pressure and FSF. Notably, high leverage ratios are often found to exacerbate the risk of financial manipulation. Therefore, drawing on both theoretical foundations and empirical findings, the following hypothesis (H) is proposed:
H1: Financial pressure positively influences FSF.
Opportunity is a critical enabler of fraudulent behaviour, as postulated by the Fraud Triangle theory (Cressey 1953). Inadequate internal controls, weak governance structures and insufficient oversight mechanisms create environments in which fraudulent actions can be perpetrated with a reduced risk of detection (Haeronnisa & Isnawati 2024). Logically, when essential elements of corporate governance, such as the presence of independent boards of commissioners, are ineffective or absent, individuals may perceive a low probability of being caught, thereby lowering the psychological deterrents against engaging in fraud.
Empirical evidence substantiates this theoretical argument. Studies by Fitri et al. (2019) and Rengganis et al. (2019) indicate that the presence of independent commissioners is associated with a decreased likelihood of fraud. However, research by Koharudin and Januarti (2021) and Amalia et al. (2025) highlights that opportunity alone may not invariably lead to fraudulent behaviour in the absence of additional pressures, suggesting a more nuanced relationship. Building on this theoretical and empirical foundation, the following hypothesis is proposed:
H2: Opportunity positively influences FSF.
Rationalisation, a psychological mechanism outlined in Cressey’s (1953) Fraud Triangle, enables individuals to justify fraudulent behaviour without perceiving themselves as unethical. It serves as a cognitive bridge between unethical actions and self-concept, allowing individuals to engage in misconduct while preserving a positive self-image (Kurnia & Yuniarti 2024; Noble 2019). Theoretically, rationalisation tendencies intensify in organisational cultures where ethical boundaries are ambiguous or inconsistently applied. Frequent changes in accounting policies may signal such ambiguity, providing individuals with convenient justifications for engaging in manipulative financial practices (Khairani et al. 2024). Logically, when management habitually alters accounting standards, it can normalise rule-bending behaviour, creating an environment where fraudulent reporting becomes more psychologically acceptable. Accordingly, grounded in both theoretical reasoning and empirical findings, the following hypothesis is proposed:
H3: Rationalisation positively influences FSF.
Capability, as introduced in the Fraud Diamond Theory (Wolfe & Hermanson 2004) presents a critical element that enables individuals to commit fraud. Even in the presence of pressure and opportunity, fraudulent acts often require perpetrators with the necessary skills, authority, and strategic insight to effectively carry them out. From a theoretical standpoint, executives or directors with long tenures are more likely to possess in-depth knowledge of internal control weaknesses and operational loopholes (Khairani et al. 2024). Analytically, extended tenure increases an individual’s familiarity with an organisation’s systems, which may enable more subtle and sophisticated manipulation of financial reports. Empirical findings support this notion; for instance, Uciati and Mukhibad (2019) and Amalia et al. (2025) found that experienced management is positively associated with a higher risk of FSF. Accordingly, based on theoretical rationale and empirical evidence, the following hypothesis is proposed:
H4: Capability positively influences FSF.
Arrogance, as introduced in the Fraud Pentagon Theory (Marks 2012), reflects an executive’s inflated sense of self-importance, leading them to believe they are above ethical norms and legal constraints. Such attitudes can undermine compliance with internal controls and foster high-risk behaviour within organisations. Theoretically, executives who exhibit arrogance may feel entitled to bypass established procedures to protect or elevate their personal status (Khairani et al. 2024; Williams et al. 2024). Logically, as CEOs accumulate power and receive increased public visibility, such as through frequent appearances in corporate communications, their sense of indispensability may intensify, increasing the likelihood of engaging in fraudulent financial reporting. This assertion is supported by empirical evidence. For example, Uciati and Mukhibad (2019) found that CEO arrogance, proxied by the frequent inclusion of CEO photographs in corporate reports, is positively associated with the occurrence of FSF. Accordingly, based on theoretical rationale and empirical support, the following hypothesis is proposed:
H5: Arrogance positively influences FSF.
Collusion, the sixth element introduced in the Fraud Hexagon Theory (Vousinas 2019), emphasises the collaborative nature of sophisticated fraudulent schemes. Fraudulent acts are often not executed in isolation but rather involve coordinated efforts among multiple individuals aimed at circumventing detection mechanisms. From a theoretical perspective, collusion undermines or entirely bypasses internal control systems that are typically effective in preventing individual misconduct. Logically, when individuals within or across organisational boundaries conspire, they can manipulate processes, fabricate documentation and obscure audit trails, making fraudulent activities far more difficult to detect (Haeronnisa & Isnawati 2024). Research by Sari and Hanafi (2023), Triyani, Yusrianti and Thamrin (2024) and Amalia et al. (2025) demonstrates that a high degree of collusion significantly increases the likelihood of FSF. Therefore, based on theoretical reasoning and empirical evidence, the following hypothesis is proposed:
H6: Collusion positively influences FSF.
Uncertainty avoidance, as conceptualised by Hofstede (2011) refers to the extent to which individuals or societies feel threatened by ambiguity and prefer structured conditions and formal rules to reduce uncertainty. Theoretically, in high uncertainty avoidance cultures, individuals are more likely to prioritise stability, order, and predictability, even if it requires engaging in unethical actions to avoid undesirable outcomes (Obschonka et al. 2023; Rachmawati et al. 2020). From a logical standpoint, individuals operating under intense pressure, opportunity, or rationalisation, may be more inclined to commit FSF in environments characterised by high uncertainty avoidance, perceiving such acts as necessary for preserving organisational continuity and minimising perceived threats. Supporting this view, Khairani et al. (2024) found that cultural dimensions like uncertainty avoidance can amplify the influence of fraud risk factors on fraudulent behaviour. Accordingly, the following hypothesis is proposed:
H7: Uncertainty avoidance moderates the relationships between pressure, opportunity, rationalisation, capability, arrogance and collusion with FSF, such that these relationships are stronger in high uncertainty avoidance environments.
Methods
This study investigates FSF among basic materials companies listed on the IDX, Bursa Malaysia, and the SGX over the period 2021 to 2023. Specifically, it examines the influence of six key factors: pressure, opportunity, rationalisation, capability, arrogance and collusion, on the occurrence of FSF, with uncertainty avoidance introduced as a moderating variable. Employing a causal research design and a quantitative approach, the study utilises secondary data extracted from annual financial reports available on the official websites of the respective stock exchanges. Cultural dimension data, particularly uncertainty avoidance, are sourced from Hofstede Insights. The documentation method is applied for data collection, enabling systematic analysis of financial and governance-related information. The study population comprises all basic materials companies listed on the IDX, Bursa Malaysia and SGX during the observation period. A purposive sampling technique is used, based on the following inclusion criteria: (1) the company must be classified under the basic materials sector; (2) it must have maintained financial solvency (i.e. not reported losses) throughout 2021 to 2023; and (3) complete data must be available for all variables under investigation
The study utilises a sample of 72 companies, selected based on predefined inclusion criteria. The unit of analysis comprises 216 firm-year observations from basic materials companies listed on the IDX, Bursa Malaysia and the SGX during the 2021 to 2023 period. All companies included in the sample meet the eligibility requirements specified for the study. The dependent variable, FSF, is measured using the F-Score method. Independent variables include pressure (measured by leverage ratio), opportunity (percentage of independent commissioners), rationalisation (frequency of accounting policy changes), capability (director changes), arrogance (number of CEO photographs in annual reports) and collusion (market performance measured by Price to Book Value). Uncertainty avoidance, serving as the moderating variable, is measured using national cultural indices from Hofstede Insights.
Data was collected through the documentation of annual reports and relevant secondary sources. The analysis employs panel data regression techniques, using E-Views 12 software for model estimation. The primary model examines the direct relationships between the independent and dependent variables. Additionally, a moderated regression analysis (MRA) is conducted to assess the moderating effect of uncertainty avoidance on the relationships between the predictors and FSF. The study applies three panel data regression models: the Common Effect Model (CEM), Fixed Effect Model (FEM) and Random Effect Model (REM). The selection of the most appropriate model is determined using Chow, Hausman and Lagrange Multiplier tests. To ensure the validity of the models, classical assumption tests are performed, with particular attention to multicollinearity diagnostics. Concerns regarding heteroskedasticity and autocorrelation are addressed by applying the Generalised Least Squares (GLS) method. For hypothesis testing, R2 is used to assess model fit, t-tests evaluate the partial effects of independent variables, and the MRA is employed to examine interaction effects. The expected findings of this study are twofold: firstly, they will empirically test the theoretical frameworks surrounding fraud behaviour in the corporate sector; secondly, they will provide insights into how cultural factors, such as uncertainty avoidance, influence fraudulent practices within the corporate financial environment in Southeast Asia.
Ethical considerations
Ethical clearance to conduct this study was obtained from the Ethics Committee of the Faculty of Economics, Sriwijaya University (No. 0835/UN9.FE/fU.KT/2025).
Results
To determine the most appropriate estimation model for panel data, two diagnostic tests were conducted: the Hausman Test and the Lagrange Multiplier (LM) Test. The Hausman Test was employed to decide between the FEM and the REM. The null hypothesis (H0) posits that the REM is appropriate, while the alternative hypothesis (H1) supports the FEM. If the p-value is greater than 0.05, the REM is preferred. The Hausman test yielded a Chi-square probability of 1.0000, which is well above the 0.05 threshold. Consequently, H0 is accepted, indicating that the REM is more appropriate than the FEM. The LM Test was subsequently applied to compare the REM with the CEM. The null hypothesis (H0) favours the CEM, while the alternative hypothesis (H1) supports the REM. A p-value below 0.05 indicates that the REM is more suitable. The test results revealed that the Breusch-Pagan statistic produced a p-value of 0.0000, leading to the rejection of H0. Therefore, the REM is deemed superior to the CEM. Based on the outcomes of both tests, the REM was selected as the most appropriate model for panel data regression in this study, as it was found to be preferable over both the Fixed Effect and Common Effect models.
The LM test, developed by Breusch and Pagan (1980), is employed to determine whether the REM is more appropriate than the CEM in panel data analysis. This test assesses the significance of random effects by evaluating the residuals obtained from the CEM. The null hypothesis (H0) posits that the CEM is adequate (i.e., random effects are not significant), while the alternative hypothesis (H1) supports the use of REM because of the presence of significant random effects. If the LM statistic exceeds the critical value derived from the Chi-square distribution, H0 is rejected in favour of H1, indicating that REM provides a better fit. Based on the results presented in Table 1, the LM test yielded a Breusch-Pagan probability value of 0.0000, which is well below the 0.05 significance level. This finding confirms the presence of significant random effects. Accordingly, H0 is rejected, and the REM is selected as the most appropriate and best-fitting model for the panel data regression employed in this study.
| TABLE 1: Results of the Lagrange Multiplier test. |
The t-test is commonly employed to assess the partial effect of each independent variable on the dependent variable (Hsiao 2022). A p-value less than 0.05 indicates statistical significance, leading to the acceptance of the hypothesis; conversely, a p-value greater than 0.05 suggests insufficient evidence to support the hypothesis. This study utilises panel data regression analysis, performed using EViews software, to examine the influence of selected independent variables on the dependent variable, profitability, which is proxied by FSF. The REM was identified as the most appropriate estimation technique based on model selection tests, and classical assumption tests confirm that the model does not violate key econometric assumptions (Okoro 2020). The results of the REM regression analysis are presented in Table 2.
| TABLE 2: Regression results of the random effect model. |
Based on the panel data regression results, the constant value is 28.42093, indicating that when all independent variables – pressure, opportunity, rationalisation, capability, arrogance and collusion – are held at zero, FSF would have a baseline level of 28.42093. This suggests a predisposition for FSF to occur even in the absence of the examined predictors.
The regression coefficient for pressure is positive at 0.644842, implying that a 1% increase in pressure is associated with a 0.644842% increase in FSF, assuming all other variables remain constant. Likewise, opportunity shows a positive coefficient of 0.061677, indicating a 1% increase in opportunity leads to a 0.061677% rise in FSF. In contrast, rationalisation displays a negative coefficient of −0.006463, suggesting that a 1% increase in rationalisation would result in a 0.006463% decline in FSF. Capability has a positive coefficient of 0.171355, indicating that a 1% increase in capability is associated with a 0.171355% increase in FSF. Similarly, arrogance exhibits a positive coefficient of 0.019853, suggesting a marginal positive influence on FSF. However, collusion shows a negative coefficient of −0.003868, implying that a 1% increase in collusion is associated with a 0.003868% decrease in FSF, ceteris paribus.
Hypothesis testing reveals that the p-values for pressure (0.0389) and capability (0.0334) are below the conventional significance threshold of 0.05. These results indicate that both variables have a statistically significant influence on FSF, thereby supporting Hypotheses H1 and H4. On the other hand, opportunity (p = 0.8006), rationalisation (p = 0.9370), arrogance (p = 0.2199), and collusion (p = 0.8515) have p-values greater than 0.05, indicating no significant effect on FSF. As a result, Hypotheses H2, H3, H5 and H6 are rejected.
This study employed panel data regression using the MRA approach to examine whether uncertainty avoidance moderates the relationships between six independent variables (pressure, opportunity, rationalisation, capability, arrogance and collusion) and the dependent variable, FSF. This approach allows for the assessment of interaction effects between the cultural dimension of uncertainty avoidance and each fraud risk factor. The estimation results are summarised in Table 3.
| TABLE 3: t-test results of the moderated regression analysis. |
Table 3 shows that among the six interaction terms, only two variables pressure (Press*UA) and collusion (Coll*UA) have statistically significant moderating effects, with p-values of 0.0257 and 0.0000, respectively. These findings suggest that uncertainty avoidance strengthens the relationship between these variables and FSF. More specifically, the interaction term between pressure and uncertainty avoidance (Press*UA) has a positive and significant coefficient (β = 0.098, p < 0.05), indicating that in environments with higher levels of uncertainty avoidance, the influence of pressure on FSF is amplified. This supports the notion that when individuals or organisations operate in cultures that are less tolerant of ambiguity, the stress induced by pressure becomes more likely to lead to fraudulent reporting behaviours.
Similarly, the interaction between collusion and uncertainty avoidance (Coll*UA) is positively significant (β = 0.010, p < 0.01), implying that high uncertainty avoidance strengthens the impact of collusion on FSF. This finding may reflect the cultural tendency to rely on trusted networks or informal agreements in uncertain environments, potentially enabling collusive practices to manipulate financial outcomes. Conversely, the interaction terms for opportunity (Press*UA), rationalisation (Ras*UA), capability (Cap*UA), and arrogance (Aro*UA) are not statistically significant (all p > 0.05). These results indicate that uncertainty avoidance does not significantly alter the effect of these variables on FSF. The absence of moderation could suggest that the impact of these factors on fraudulent behaviour operates independently of cultural attitudes toward uncertainty.
These findings contribute to the literature by demonstrating that cultural dimensions, particularly uncertainty avoidance, play a selective role in moderating fraud-related behaviours. The significant moderation effects for pressure and collusion are aligned with theoretical expectations from the Fraud Triangle and Diamond Theory, wherein psychological and social dynamics interact with cultural norms to influence unethical decision-making.
Discussion
The hypothesis testing results indicate that pressure has a statistically significant positive effect on FSF, with a regression coefficient of 0.644842 and a p-value of 0.0389 (<0.05), thereby supporting H1. This result reinforces the Fraud Hexagon Theory, which posits that pressure, particularly in the form of financial strain or ambitious performance targets, can drive individuals to manipulate financial reports as a coping mechanism. Theoretically, this finding is also supported by Agency Theory, which emphasises the conflict of interest between managers and shareholders. Under conditions of pressure, managers may engage in opportunistic behaviour to fulfil expectations or to avoid negative consequences. Logically, firms experiencing financial deterioration or heightened scrutiny from external stakeholders (e.g. lenders or investors) may inadvertently incentivise fraudulent behaviour as a means of signalling stability. These findings are consistent with previous research (Honesty et al. 2024; Hudayati et al. 2022), but contrast with the results of Handoko and Natasya (2019), and Khairani et al. (2024), which may reflect contextual differences in pressure intensity or regulatory enforcement environments.
In contrast, the results reveal that opportunity does not have a statistically significant influence on FSF (coefficient = 0.061677; p-value = 0.8006 > 0.05), leading to the rejection of H2. This finding challenges the core proposition of the Fraud Hexagon Theory, which suggests that weak internal controls or ineffective oversight mechanisms create a conducive environment for fraudulent behaviour. Theoretically, the lack of significance may be attributed to the phenomenon of institutional isomorphism, wherein organisations adopt standardised governance structures (e.g. the presence of independent commissioners) that comply symbolically with regulatory expectations but may lack substantive enforcement. From a practical perspective, the mere presence of opportunity may be insufficient to induce fraud unless it coexists with strong motivational factors (e.g., pressure) and rationalisations. This outcome is consistent with studies by Koharudin and Januarti (2021) and Wicaksono and Suryandari (2021), which argue that opportunity alone does not guarantee fraudulent activity in the absence of complementary enablers. However, this result diverges from findings by Wibowo and Lastanti (2024) potentially because of differing operationalisations of the opportunity construct or variations in governance quality across sampled firms.
Rationalisation was found to have a statistically non-significant negative effect on FSF (coefficient = −0.006463; p-value = 0.9370 > 0.05), leading to the rejection of H3. Theoretically, rationalisation is a key psychological mechanism that enables individuals to justify unethical actions, as proposed by Cognitive Dissonance Theory. This theory suggests that individuals seek to align their actions with internal beliefs or reduce psychological discomfort resulting from misconduct. However, in organisations characterised by strong ethical cultures and transparent governance structures, such rationalisation may be curtailed by institutional norms and external accountability. Logically, even when individuals attempt to legitimise fraudulent behaviour, effective internal controls and stakeholder oversight may suppress the translation of such justifications into actual misconduct. Moreover, the implementation of Good Corporate Governance (GCG) practices may reduce the cognitive leeway required for rationalisation, thereby minimising its influence on fraud decisions. This finding is in line with studies by Khairani et al. (2024), Yusrianti et al. (2020), and Wibowo and Lastanti (2024), but contrasts with the results of Pradipta and Bernawati (2019), which may stem from variations in the operationalisation of rationalisation or differences in ethical climates across firms.
In contrast, capability was found to have a statistically significant and positive effect on FSF (coefficient = 0.171355; p-value = 0.0334 < 0.05), thereby supporting H4. This result is consistent with the Fraud Hexagon Theory, which posits that individuals in positions of authority who possess specialised knowledge and experience are more likely to initiate and conceal fraudulent acts. Logically, individuals with extended tenures or control over the financial reporting process not only have the technical means but also the organisational confidence to override internal controls undetected. Theoretically, this finding is aligned with the Fraud Diamond model, in which capability is regarded as a crucial enabler, often associated with traits such as dominance, intelligence, and strategic acumen. These insights underscore the paradox that while managerial competence is essential for performance, it may also facilitate manipulation in environments lacking robust checks and balances. This result supports the findings of Uciati and Mukhibad (2019), but contrasts with those of Wibowo and Lastanti (2024), Lyra et al. (2022), and others, likely as a result of differences in the proxies used for capability (e.g. tenure vs. educational background) or the regulatory and governance environments across industries and countries.
Arrogance was found to have no statistically significant effect on FSF (coefficient = 0.019853; p-value = 0.2199 > 0.05), leading to the rejection of H5. According to the Fraud Hexagon Theory, arrogance, defined as an executive’s belief in being above rules or oversight, can foster fraudulent tendencies. However, in this study, arrogance was operationalised through the frequency of CEO photographs in annual reports, which may insufficiently reflect deeper behavioural traits such as narcissism or overconfidence. Theoretically, Upper Echelons Theory posits that executive personality traits, including egocentricity, influence organisational outcomes and ethical judgements. Nonetheless, reliance on symbolic or visual cues may limit the construct’s validity in capturing the psychological dimensions of arrogance. Logically, the presence of CEO images may reflect standardised corporate communication practices rather than manifestations of self-aggrandisation or rule-defying attitudes. Thus, the non-significant result aligns with findings by Khairani et al. (2024) and Situngkir and Triyanto (2020), while diverging from Uciati and Mukhibad (2019), who adopted more comprehensive behavioural indicators of executive arrogance.
Collusion, likewise, was found to have a non-significant effect on FSF (coefficient = −0.003868; p-value = 0.8515 > 0.05), resulting in the rejection of H6. The Fraud Hexagon Theory conceptualises collusion as a critical enabler that reduces the probability of detection and increases fraud concealment. However, its actual influence may be contextually moderated by factors such as organisational transparency, the presence of whistleblower protections or the effectiveness of internal audit functions. From a collective action perspective, engaging in collusion involves shared risk, which may deter participation unless mutual trust, secrecy, and aligned incentives are strongly present. Logically, this implies that while relational networks exist within firms, the potential legal consequences and reputational damage of collusion may outweigh its perceived benefits, thereby limiting its occurrence. This finding is consistent with Lyra et al. (2022), suggesting that collusion may not always be a dominant determinant of fraud in governance-rich environments. However, the result contradicts studies by Khairani et al. (2024) and Wibowo and Lastanti (2024) possibly because of differences in measurement approaches or industry-specific dynamics influencing the feasibility of collusion.
The results of the MRA, presented in Section 4.6, indicate that Uncertainty Avoidance significantly moderates the relationship between pressure and collusion with FSF. Specifically, the interaction between pressure and Uncertainty Avoidance yielded a positive regression coefficient of 0.098177 with a p-value of 0.0257 (< 0.05), while the interaction between collusion and Uncertainty Avoidance produced a coefficient of 0.010470 with a highly significant p-value of 0.0000 (<0.05). These results provide empirical support for hypotheses H7 a and H7 f, confirming that Uncertainty Avoidance amplifies the influence of both pressure and collusion on FSF. Theoretically, these findings align with Hofstede’s cultural dimensions theory, which suggests that individuals in low Uncertainty Avoidance cultures tend to tolerate ambiguity and are more inclined toward risk-taking behaviour. In such contexts, when individuals experience high levels of pressure, such as financial performance demands or regulatory scrutiny, they may be more likely to engage in unethical practices, including financial statement manipulation, as a means to regain control or ensure short-term survival. This behaviour is further supported by prospect theory, which posits that under threat or loss, decision-makers prioritise loss aversion, even if it entails unethical or deceptive actions. Logically, individuals in low Uncertainty Avoidance environments may perceive fraud as a rational risk management strategy, particularly under conditions of intense pressure. Moreover, the significant interaction between collusion and Uncertainty Avoidance suggests that cultural tolerance for ambiguity can weaken individual moral resistance when unethical actions are conducted collectively. This is consistent with social facilitation theory, wherein individuals are more prone to deviant behaviour in group settings, particularly in ambiguous or weakly regulated environments where personal accountability is diffused. In this context, collusion becomes easier to justify, enabling collaborative fraud and undermining the integrity of financial reporting. These findings are in line with previous research by Roshanpoor et al. (2024), Yoo and Lee (2019) and Lannai et al. (2020), all of which highlight the amplifying role of Uncertainty Avoidance in facilitating fraud under specific environmental or psychological pressures.
Conversely, Uncertainty Avoidance does not moderate the relationship between opportunity, rationalisation, capability and arrogance with FSF. The interaction terms for each of these variables yielded statistically insignificant results: opportunity (coefficient = –0.001712; p = 0.9150), rationalisation (coefficient = –0.021571; p = 0.0970), capability (coefficient = 0.004049; p = 0.7270) and arrogance (coefficient = –0.001485; p = 0.5249). These findings indicate that Uncertainty Avoidance neither strengthens nor weakens the influence of these four factors on FSF, resulting in the rejection of hypotheses H7b through H7e. From a theoretical standpoint, these outcomes can be interpreted through the lens of institutional theory, which posits that actors embedded in high Uncertainty Avoidance environments tend to adhere more strictly to formal rules, procedures and normative expectations in order to minimise ambiguity and risk. Therefore, even when conditions conducive to fraud exist, such as perceived opportunities or internal justifications, individuals may abstain from unethical behaviour as a result of fear of sanctions, social disapproval or institutional consequences. Similarly, individuals with high capability or arrogance may be constrained by strong governance frameworks and regulatory enforcement in such settings, thereby neutralising their ability to act on personal motivations or cognitive biases. Logically, these results suggest that the mere presence of enablers like opportunity or capability is insufficient to trigger fraudulent conduct without a corresponding cultural or organisational context that permits risk-taking or ethical flexibility. In high Uncertainty Avoidance cultures, individuals tend to avoid behaviours that could disrupt established order, preferring compliance over opportunism. As a result, the influence of these factors is muted in environments where ambiguity is actively managed and deviance is institutionally discouraged. These findings are consistent with prior studies by Wang et al. (2023), Khairani et al. (2024), and Chen (2024), which also report that Uncertainty Avoidance weakens or fails to moderate the relationship between opportunity-driven fraud determinants and actual fraudulent outcomes.
In conclusion, this study finds that Uncertainty Avoidance significantly moderates the effect of pressure and collusion on FSF, but not the effect of opportunity, rationalisation, capability or arrogance. This nuanced understanding underscores the importance of incorporating cultural dimensions into fraud risk assessments, as they influence the behavioural pathways through which fraud determinants manifest within organisations.
Conclusion
Implications, suggestions and limitations
This study aimed to examine the effect of the six components of the Fraud Hexagon (pressure, opportunity, rationalisation, capability, arrogance and collusion) on FSF, with uncertainty avoidance as a moderating variable. The analysis was conducted on companies within the basic materials sector listed on the IDX, SGX and Bursa Malaysia during the period of 2021–2023. The empirical results indicate that pressure and capability are the most significant drivers of FSF.
Pressure, proxied by the ratio of total liabilities to total assets, showed a positive and significant relationship with fraudulent financial reporting. This finding supports the core idea of the Fraud Triangle theory, which identifies pressure as a key motivator that pushes individuals or management to manipulate financial information to achieve stability or meet certain targets. In a similar vein, capability, represented by changes in executive leadership, demonstrated a significant positive impact on FSF. This result aligns with the Fraud Diamond Theory, which adds capability as a critical prerequisite for fraud. It suggests that individuals in positions of power, who possess access and authority over financial systems, are better positioned to commit fraud without detection.
On the other hand, the variables of opportunity, rationalisation, arrogance and collusion did not show significant effects on FSF. Opportunity, as measured by the proportion of independent commissioners, may not fully capture the actual effectiveness of oversight mechanisms in preventing fraud. Additionally, psychological elements such as rationalisation and arrogance are difficult to quantify using external proxies like accounting policy changes or the frequency of CEO photos. Similarly, collusion, proxied by the market-to-book ratio, did not demonstrate a significant influence – possibly because this financial metric may not adequately represent internal fraudulent collaboration practices.
Regarding the moderating role of uncertainty avoidance, the results indicate that it strengthens the relationship between pressure and collusion with FSF. In cultural settings with low uncertainty avoidance, individuals tend to tolerate ambiguity and risk more easily, making them more likely to commit fraud under pressure or in collusion with others to create an illusion of stability. However, uncertainty avoidance did not moderate the relationship between opportunity, rationalisation, capability and arrogance with FSF. In high uncertainty avoidance contexts, individuals tend to adhere more strictly to established rules and systems, reducing their likelihood of engaging in fraud, even when opportunity or justification exists.
This study, however, is subject to several limitations. Firstly, it focuses solely on the basic materials sector in three Southeast Asian stock exchanges, which may restrict the generalizability of the findings to other industries or regions. Secondly, the observation period is limited to 3 years (2021–2023), potentially overlooking long-term fraud patterns. Thirdly, the research only examines six variables from the fraud hexagon framework, leaving out other possible contributing factors. To address these limitations, future researchers are encouraged to expand the study to other sectors with high fraud risk potential and extend the observation period for broader insights. It is also recommended to include additional variables, such as ethical climate or corporate governance indicators, to provide a more comprehensive understanding of FSF.
Moreover, based on the findings, companies should prioritise reinforcing internal and external controls to mitigate fraud risks effectively. This may involve enhancing internal audits, strengthening corporate governance structures and promoting a culture of ethical decision-making, all of which could play crucial roles in preventing fraudulent practices in financial reporting.
Acknowledgements
This article is partially based on Deya Winanda’s undergraduate thesis titled ‘The Effect of Fraud Hexagon on Financial Statement Fraud with Uncertainty Avoidance as a Moderating Variable’ towards the degree of Bachelor of Accounting in the Department of Accounting, Universitas Sriwijaya, Indonesia, completed in 2025. The thesis was supervised by Yusnaini Yusnaini. The thesis is currently unpublished and is not available online. The thesis was reworked, revised, and adapted into a journal article for publication.
Competing interests
The authors declare that they have no financial or personal relationships that may have inappropriately influenced them in writing this article.
CRediT authorship contribution
Yusnaini Yusnaini: Conceptualisation, Methodology, Formal analysis, Investigation, Writing – original draft, Validation, Data curation, Resources, Writing – review & editing, Supervision, Funding acquisition. Deya Winanda: Formal analysis, Investigation, Project administration, Software, Data curation, Resources. Arista Hakiki: Formal analysis, Investigation, Project administration, Software, Validation, Data curation, Resources, Writing – review & editing, Funding acquisition. All authors reviewed the article, contributed to the discussion of results, approved the final version for submission and publication, and take responsibility for the integrity of its findings.
Funding information
The authors received no financial support for the research, authorship and/or publication of this article.
Data availability
The authors declare that all data that support this research article and findings are available in the article and its references.
Disclaimer
The views and opinions expressed in this article are those of the authors and are the product of professional research. They do not necessarily reflect the official policy or position of any affiliated institution, funder, agency, or that of the publisher. The authors are responsible for this article’s results, findings, and content.
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