The Black Box of Fraudulent Financial Statements: Do Digital Audit Procedures Matter?

Abstract

Introduction: Fraud in financial statements is a serious and complex issue in modern accounting and auditing. Although financial statements should reflect an entity’s true financial condition, management often manipulates them to mislead stakeholders.

Objectives: This study aims to examine the phenomenon of fraudulent financial statements and assess the extent to which audit procedures are able to detect fraud hidden behind the company's financial statements. This phenomenon is known as the black box of fraud, where financial manipulation is carried out systematically and disguised through seemingly legitimate accounting procedures.

Methods: This study uses a descriptive qualitative approach with a case study method on several large companies in Indonesia.

Results: The results show that the majority of fraud cases are rooted in weak internal controls, collusion between internal and external parties, and auditors' failure to implement professional skepticism and critical audit procedures. Fraud occurs through various means, including asset mark-ups, premature recognition of income, and undisclosed affiliate transactions. From the accounting side, this manipulation violates the principles of fair value, faithful representation, and full disclosure.

Conclusions: This study confirms that the effectiveness of audit procedures is not only determined by compliance with standards, but also by the auditor's ability to assess the economic substance behind each transaction. Strengthening risk-based audit procedures, using data analytics, and increasing auditor independence and integrity are key in penetrating complex fraud "black boxes". Thus, this research makes a theoretical and practical contribution to the accounting profession and regulators in improving audit reliability and public trust in financial statements.