The Effect of Financial Pressure on Financial Reporting Fraud: Insights from Sharia and Non-Sharia Firms

Abstract

Purpose: The study examines the impact of financial pressure on financial reporting fraud. It also explores the variation of financial pressure between Sharia-compliant and non-Sharia firms, as Sharia-compliant companies are bound by Sharia principles.

Method: The study uses data from public firms listed on the Indonesia Stock Exchange (IDX) and the Indonesia Sharia Stock Index (ISSI) for the period 2015–2021. All industrial sectors are included, except the financial sector, due to its distinct regulations and policies. The research employs multiple linear regression and independent-samples t-tests.

Findings: The study reveals that pressures related to financial stability and debt are associated with a higher probability of financial reporting fraud. In addition, pressures arising from financial stability and financial targets are more pronounced in Sharia-compliant firms than in non-Sharia firms. In contrast, Sharia-compliant firms exhibit lower debt pressure than non-Sharia firms.

Novelty: The study provides empirical evidence on how financial stability, financial target pressure, and debt pressure differ between Sharia and non-Sharia firms, and how these differences are relevant in explaining the risk of financial reporting fraud. The findings indicate that Sharia-compliant firms exhibit greater financial stability and financial target pressures, but lower debt pressure due to Sharia-based debt restrictions, offering new insights into fraud risk determinants in the context of Sharia compliance.