Strategies to Mitigate Financial Fraud Through Intellectual Capital Management

Abstract

This research aims to examine the impact of intellectual capital on financial statement fraud, both directly and indirectly through the mediating role of financial distress. Intellectual capital, encompassing human capital, structural capital, and relational capital, plays a crucial role in organizational performance and decision-making processes. Understanding its relationship with financial statement fraud offers insights into how intangible assets influence ethical and financial practices within firms. The study also explores the role of financial distress as a potential mediating factor. Financial distress, often a precursor to unethical financial reporting practices, may create pressure on organizations to manipulate financial statements to present a more favorable image. By mediating the relationship between intellectual capital and financial statement fraud, financial distress sheds light on the conditions under which intellectual capital might fail to curb fraudulent activities or, conversely, act as a buffer against financial reporting misconduct. Through this dual examination, the research seeks to provide a comprehensive understanding of how intellectual capital contributes to or mitigates financial fraud risks and the extent to which financial distress influences this dynamic. The findings aim to guide policymakers, regulators, and organizations in developing strategies to strengthen corporate governance, enhance ethical practices, and leverage intellectual capital effectively to reduce the risk of financial statement fraud. The population for this study comprises banking companies listed on the Indonesia Stock Exchange during the period from 2016 to 2023. To identify the research sample, a purposive sampling method was employed, focusing on specific criteria to ensure the relevance and reliability of the data. This sampling process yielded a final dataset consisting of 64 observations over the six-year observation period. By applying purposive sampling, the study ensures that the selected banking companies align with the research objectives, particularly in assessing the relationship between intellectual capital, financial distress, and financial statement fraud. This method also facilitates a focused analysis on firms that meet predefined criteria, enhancing the validity and applicability of the research findings within the banking sector. The data for this study were analyzed using multiple regression and path analysis, conducted through SPSS version 26. The results indicate that intellectual capital has a significant influence on financial statement fraud. Additionally, financial distress was found to play a mediating role in the relationship between intellectual capital and financial statement fraud. This suggests that while intellectual capital directly impacts the likelihood of financial statement fraud, its influence is also indirectly channeled through financial distress. Organizations with inadequate intellectual capital may face operational inefficiencies and decision-making challenges, increasing their susceptibility to financial distress. This, in turn, raises the likelihood of financial statement manipulation as a coping mechanism. The findings highlight the dual pathway through which intellectual capital impacts financial statement fraud, emphasizing the importance of robust intellectual resources and sound financial management practices. These results are valuable for banking companies, regulators, and policymakers in designing strategies to mitigate fraud risks by improving intellectual capital utilization and addressing financial distress proactively.