Study on Early Detection of Potential Financial Statement Fraud: External Auditors’ Judgement Perspective

Financial statement fraud has occurred frequently, and external auditors are often unable to make early detection of such fraud. External auditors are auditors who are assigned to check the fairness of the financial statements of business entities. To be able to learn from the experience of fraud cases that have occurred, auditors can take advantage of the Electronic Knowledge Repository (EKR). This study aims to provide empirical evidence that auditors’ independence, utilization of EKR and mastery of good governance principles can affect auditors’ judgment in early detection of potential fraudulent in financial statements. The research population is auditors at the Public Accounting Firms (PAFs) in Jakarta. The sample was selected based on cluster-random sampling, namely clusters of PAFs affiliated with foreign PAFs and non-affiliated PAFs. Each cluster is selected randomly. The number of respondents who participated were 105 auditors, consisted of 53 foreign affiliated PAF auditors and 52 non-affiliated PAF auditors. The research instrument used were a closed questionnaire and an open questionnaire. An open questionnaire was used to measure the auditors’ judgment in assessing the potential for fraud. The research design is causal, and the data was analysed using Partial Least Square. The results of the study conclude that auditors’ independence, EKR, and corporate governance have a positive and significant effect on auditors’ judgment in detecting fraudulent in financial statements. The results of the research can be used by the Financial Services Authority and PAFs in order to improve the service quality of Public Accountants.