The Role of Profitability, Leverage and Ineffective Monitoring in Detecting Fraudulent Financial Reporting

This study aims to examine the potential for fraudulent financial reporting by applying the fraud hexagon theory framework, focusing on three main determinants: profitability, leverage, and ineffective monitoring. The research population includes healthcare sector manufacturing companies listed on the Indonesia Stock Exchange (IDX) during the period 2019–2023, with the sample selected using purposive sampling techniques, resulting in 20 eligible companies that met the specified criteria. The analysis employed time series regression using EViews 12 as the primary statistical tool to test the hypotheses. The findings indicate that profitability has a negative effect on the likelihood of fraudulent financial reporting, suggesting that firms with stronger financial performance are less likely to manipulate their reports. In contrast, leverage and ineffective monitoring both exhibit positive and significant effects, meaning that companies with higher debt burdens and weaker supervisory mechanisms face greater risks of engaging in financial fraud. These results highlight that while profitability can act as a safeguard against fraudulent practices, excessive leverage and insufficient oversight create strong incentives and opportunities for manipulation. The implications of this study are twofold: for corporate management, it emphasizes the importance of maintaining financial health and strengthening monitoring mechanisms to reduce the risk of fraud; for regulators and auditors, it suggests closer scrutiny of highly leveraged firms and those with weak governance structures. Overall, the research contributes empirical evidence to the understanding of fraud risk factors within the healthcare manufacturing sector in Indonesia and underscores the necessity of integrating profitability, leverage, and monitoring considerations in developing fraud prevention frameworks. By doing so, companies and regulators can enhance transparency, accountability, and investor confidence in financial reporting practices.