Can Corporate Governance Structures Reduce Fraudulent Financial Reporting in the Banking Sector? Insights from the Fraud Hexagon Framework

This study investigates the determinants of Fraudulent Financial Reporting (FFR) in the banking sector from 2020 to 2024 by integrating the Fraud Hexagon framework within a risk and financial management perspective. The research employs a robust empirical analysis using financial and governance data to examine six key elements—pressure, opportunity, rationalization, capability, arrogance, and collusion—that shape fraud risk behavior in financial institutions. The findings reveal that internal risk pressures, such as high leverage and performance demands, significantly influence fraud incentives, whereas ineffective monitoring mechanisms, auditor switching, chairperson changes, and CEO visibility show limited effects on FFR. Moreover, cooperation with government entities does not automatically reduce fraud risk unless supported by strong and independent risk governance structures. The study highlights the crucial role of corporate governance mechanisms, including audit committees, institutional ownership, and internal control systems, in mitigating fraud risk and enhancing financial reporting integrity. From a policy perspective, the research provides strategic insights for regulators and supervisory bodies—such as the Financial Services Authority (OJK)—to strengthen governance frameworks, enforce stricter disclosure requirements, and integrate fraud risk management practices into corporate oversight. Overall, the study contributes to the literature on financial governance by demonstrating how effective risk management and governance alignment can reduce fraudulent reporting and improve the sustainability of the banking sector.