ChapterI Introduction 1.1Background Inthelate20thcenturyIndonesiaexperiencedatransitionintheeconomywherethey previouslywereanagriculture-basedeconomytoamorediverseone.Thisparticularshift hasbeenfundamentalinpropellingIndonesia’seconomytobecomeoneofthemost promisingemergingeconomiesintheworld.Indonesia’sresilientgrowthintheeconomy sincethenhasmadeitoneofthebestcountriestoinvestinduetothehighceilingforgrowth. WithIndonesiabeingthe4thlargestcountrybypopulationintheworld,the24thlargest tradinggoodspartnerandthe7thlargesteconomybypurchasingpower,therelianceofthe country’seconomytowardslargecorporationsbothinternationalanddomestichasplayeda criticalroletotechnologicaldevelopment,jobcreation,exportsandespeciallytheGDP. BigcorporationshaveapivotalroleinIndonesia'seconomy,theseentitiescontribute39.5% tothecountry'sGDPin2019,equivalenttoIDR15,833.9trillion.Giventheirsignificant impact,theseentitiesoftenrequiresubstantialfundingtosustainandexpandtheiroperations. Thisneedforcapitaldrivesthemtoseekinvestmentfromexternalsources.However, investorstypicallyfavorcompaniesthatdemonstratestrongfinancialprofitability,acriterion thatmanyofthesecorporationsseekinginvestmentmaynotmeet.Thisiswhythese companiesareconstantlybeingmonitoredforaccountingviolationssuchasfraudor embezzlementbyCenterforFinancialTransactionReportsandAnalysis(PPATK) Thereareavarietyofaccountingviolationssuchasmisrepresentationoffinancialreports whichisdoneby41%ofcompanies.Fortunately,securityfraud(atypeoffinancialfraud)is doneby10%ofalllargecorporationsonaverage,witha95%confidenceintervalbetween7 and14%(Dyck,A.,Morse,A.&Zingales,L.,2023).Thisiswhyfinancialauditorsareat theforefrontinensuringintegrityastheyaretheoneswhopreventthemfromcommitting financialcrimeorembezzlement.Theyareresponsibleforassessingthefinancialstatements ofacompanywithprecision,identificationoffraudorerrors,ensureadherencetolegal standardsandallowstakeholderstobefurnishedwithdependablefinancialinformation. Forthesecondyearrunning,thePCAOBnoted,thereweremoreauditfaultsin202240%of auditshadflaws,comparedto34%and29%in2021and2020,respectively.Thisrisebegs thequestionofwhethernecessaryauditingstandardsarebeingfollowedanddemands internalreformsinauditcompanies. Theanalysissuggeststhatorganizationsmaybefindingitdifficulttomaintainconsistent complianceincertainareasbecausethesedeficienciesaretypicallyrecurringproblems.The proceduresusedbyauditingfirmsforauditexecutionandqualitycontrolneedtobegreatly improved.ThePublicCompanyAccountingOversightBoard(PCAOB)warnedthatit anticipatedalargerrateoffailureswithrelationtoparticularnoncomplianceissues. ThedegreeofoutsidecontrolishighlightedbythePCAOB'srecommendationthataudit firmsresolveissuespromptlyandkeepinvestorobligations.ThePCAOBisoneofthe regulatorybodiesthatmonitorstherulesandlegislationthatareessentialtofinancial reportingintegrity. Auditcommitteeparticipationinobservingcompliancewithauditfirmrequirementsislinked withinternalcontrolprocedures.Onegoalofinternalcontrol,whichentailspoliciesand practicesputinplaceinsidecompanies,isaccuracyoffinancialreports.Employingaudit committees,whichcanconsistofindependentboardmembers,isonewaythatbusinesses mayimprovetheirinternalcontrolsystem.Theaccuracyoffinancialreportingiseventually improvedbythiscooperativeeffortsinceitpreservestheauditingstandardandincreases accountability. 1.2ProblemStatement IntheadvancementofIndonesia’seconomylargecorporations’rolehasbeencrucialin drivingthenation’sgrowth.However,thisprogressisoftenovershadowedbyfinancialfraud casesinIndonesiasuchasthehugecorruptioncasebyWaskitaKaryawhichcausesthemto beonthevergeofbankruptcy.Theamountofmoneywhichwasconsideredasfabricated transactionsamountedtoanoutstandingRp2.5Trillion.Thissignificantlosshighlightsthe vulnerabilitiesincorporategovernanceamongbigcorporationsaswellasraisesconcernsin regardstotheeffectivenessoftheauditorsbehindthem. Therearemanymethodswhereacompanycancommitfinancialfraudsuchastaxevasions, payrollfraud,revenuerecognitionfraud,etc.Thesemethodscanbeincorporatedintothe company’srevenuestreamandexpensesespeciallytheaccountcodeswithbigvalues.People oftenlookawayatslightdecimalroundoffsorerrorssincetheydonotthinkitwouldmatter thatmuchhowever,thesesmalldecimalerrorscouldmeanmuchmoreifitisdifferentiating anaccountworthRp1billion.Thisiswhyfinancialfraudtendstohappenintherevenue streamduetoitusuallybeingtheaccountwiththehighestvalueThisitselfposesarealthreat towardsthetransparencyaswellasreliabilityofcorporatefinancialreporting.This jeopardizesshareholdervalueandmaycreatearippleeffectwhichtriggersthewrong perceptionofthecompanyinthemarketandleadtobigconsequences. Duetothesehugeconsequencesinternalorexternalauditorshaveahugeresponsibilityin maintainingthetruefinancialhealthofthecompany.Auditorsareatthefrontlineensuring theaccuracyandintegrityoffinancialstatements.Theintricacyoffinancialdealings, combinedwiththecreativetacticsusedtohidefraudulentacts,considerablyheightensthe difficultiesauditorsencounter.Thisisabiggerproblemintheretailindustryduetoitbeing oneofthemorecomplicatedtypesofindustries.Theretailsectorpresentsuniqueobstacles foraccountants,strictlybecauseofitsoperationalandfinancialcomplexities.Handlingthe largeandfluctuatinginventorycommoninretailsettingsrequiressophisticatedaccounting methodsforprecisecostmonitoringandshrinkagemanagement.Additionally,retailers handleasubstantialnumberoftransactions,makingthetrackingofsalesandreconciliationof transactionsmorechallenging.Giventhenarrowprofitmarginstypicaloftheindustry, accuratecostcontrolandmarginanalysisarevitalforsustainingprofitability.Their responsibilityextendsbeyondpinpointingirregularitiesinfinancialstatementstograspingthe subtletiesofdiversefraudulentschemes,suchastaxevasion,payrollfraud,andespecially, fraudrelatedtotherecognitionofrevenue. Addressingthechallengesposedbytheseactivities,acollaborativeeffortamongstauditors, corporationsandtheauthoritiesareneeded.Thecorporations’transparencyisoftheutmost importancetotheauditorsandthatbeingsaid,theeffectivenessoftheseentitiesarecrucial. Howeverdespitethebestefforts,errorsareinevitablewhichiswhytomitigatetheseerrors weneedtodeterminethekeyfactorstoinitiatethebestapproachtofacethesechallenges. ThereasonwhyIchoseAksesmuisbecauseAksesmuisacompanywhoprovidesproducts toretailSMEswhichisahugemarket.ResearchbyYCPSolidiancesaidthatIndonesiahas 62millionSMEsand98%ofthemaremicro-enterprises,theyhold67%oftheworkforceand contribute40%ofIndonesia’sGDPin2022.OutofthoseSMEsIndonesianChamberof CommerceandIndustryreportedthat28%ofitisretailandtheykeeponrisingeachyear. Thismeansthemarketforretailishugeandhasyettoreachitspeakpotential.Aksesmu servestheGeneralTrade(GT)market,whichstillhasa70%marketsharethatisnotyet reached,unlikeAlfamart,whichservestheModernTrademarketwitha30%market share(ACNielsen).ThuscreatingtheurgencytowhichareportonAksesmushouldbe conducted.ThiswillcreateahugeshiftonthefuturemarketofIndonesiahencemakinga hugeimpactontheeconomyandretailindustryitself. 1.3ResearchQuestions 1.Howdoauditorsdetectfinancialfraudintherevenuestreamofretailcompanies. 2.Whatarethekeychallengesindetectingfinancialfraud. 1.4Researchobjective Theprimaryobjectiveofthisstudyistodwellintothevariousmechanismsemployedto uncoverfinancialfraudoccurringinsidetherevenuechannelsoftheretailbusinessin Indonesia.Thisinvestigationaimsnotonlytocomprehendtheeffectivenessofthese mechanismsthoroughlyandhighlighttheenhancementswhichcanbemade.Bydoingso,the researchseekstoprovideacomprehensiveunderstandingofthecurrentstateofthedetection offraudwithinthesecompanies,assessingtheirstrengthsandweaknesses,andproposing valuableinsightsforimprovingtheseprocesses.Thisin-depthanalysiswillincludeareview ofbothtraditionalandinnovativefrauddetectionmethodologies,theirapplicationinthe Indonesianretailsector,andtheroleoftechnologicaladvancementsinimprovingthe accuracyandefficiencyofthesefrauddetectionefforts.Thehypothesisitselfwouldbethat bothtraditionalandinnovativemethodsshouldbeusedtogetapreciseaudit..