Unmasking Fraudulent Financial Statements in Banks: The Interplay of Greenwashing, Political Connection, and Board Independence

Abstract

Purpose: The study investigates the relationship between greenwashing, political connections, and fraudulent financial statements in the Indonesian banking sector, with independent commissioners serving as a moderating variable.

Methods/Study design/Approach: The study uses panel data from 434 bank-year observations of Indonesian commercial banks during 2016–2022. Fraud is measured using the F-Score and Beneish M-Score models, while the hypotheses are tested using panel regression and moderation analysis.

Result/Findings: The results show that greenwashing is significantly associated with fraudulent financial reporting, generally negatively across models. Political connections also significantly affect fraudulent financial statement, although the direction varies by measurement approach. Independent commissioners moderate the relationship between greenwashing and fraud, but their role in the political connections-fraud relationship is limited. Analysis comparing pre-crisis and COVID-19 periods shows that economic stress influences these relationships. Findings have practical implications for banking governance by emphasizing effective board oversight, stronger monitoring by independent commissioners, and improved transparency in sustainability and political-related disclosures to reducing fraud.

Novelty/Originality/Value: The study contributes to the literature by Employing both F-Score and M-Score models and comparing pre-crisis and COVID-19 periods, the study shows that economic stress and ESG scrutiny alter governance effectiveness and incentives for fraudulent reporting in emerging-market banks.