ANALYSIS OF FINANCIAL DISTRESS AND FINANCIAL REPORTING FRAUDULENT TO PREVENT PAYMENT FAILURE: CASE STUDY OF INSURANCE INDUSTRY

Abstract

According to CNBC, in recent years several Indonesian insurance companies have faced problems due to their failure to pay claims due to financial distress and significant increase of financial reporting fraud cases that occurred that led to a loss of public trust. Understanding a company's financial condition is very important for customers and investors before buying a policy and shares of the company. Therefore, it can be a reference before placing their money in a company to be able to know how much risk they might suffer in the future. Insurance companies are businesses that are vulnerable to bankruptcy because the nature of the business is influenced by public trust. This research aims to determine if the companies are experiencing financial distress and indicated to commit financial reporting fraud as a result of pressure or encouragement to manipulate the financial reporting and hide the truth about company performance. The sample used in this research was financial reporting of 18 public insurance companies registered on IDX from 2020-2023. Altman Z-Score is used to predict financial distress and Beneish M-Score is used to detect financial report fraud. The result of the research calculations is that by the period 2020-2023 there were 2 companies that were predicted to be experiencing financial distress and 5 companies in the grey zone. Moreover, there were 4 companies that are predicted to be experiencing financial distress and detected to commit financial reporting fraud. The result of this research might be helpful for customers and investors in making decisions.