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Study Finds Whistleblowing Systems Less Effective in Fraud Detection – Lifestyle Changes More Telling.

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Researchers have identified crucial insights into the effectiveness of whistleblowing systems, lifestyles, and organisational culture in detecting fraudulent financial statements. This research, conducted in non-bank state-owned enterprises (BUMNs) in Palembang City, Indonesia, provides a nuanced understanding of the interplay between these variables and their impact on financial fraud detection.

The study focused on determining the influence of the whistleblowing system, lifestyle, and organisational culture on identifying financial statement fraud, with individual morality as a moderating variable. Utilising a comprehensive methodology, including interviews and questionnaires, the researchers employed multiple linear regression analysis to interpret the data from 78 internal auditors.

The findings were published in the journal Migration Letters.

The whistleblowing system, contrary to popular belief, did not significantly impact financial fraud detection. This finding aligns with previous research, suggesting that the mere presence of a whistleblowing mechanism does not guarantee its effectiveness in curbing financial fraud.

Conversely, the study found that lifestyle plays a significant role in detecting financial statement fraud. This aspect considers employees’ expenditure patterns, suggesting that observation of lifestyle changes could indicate potential fraudulent activities.

Surprisingly, organisational culture showed no significant effect on fraud detection. This outcome challenges the prevailing notion that a robust organisational culture inherently reduces fraudulent activities.

Individual morality, hypothesised as a moderating variable, did not significantly influence the whistleblowing system or organisational culture in detecting fraudulent financial statements. However, it did act as a moderator predictor for lifestyle, indicating its subtle yet critical role in shaping employees’ behaviour.

These findings have profound implications for businesses and auditors. They highlight the need for more nuanced strategies beyond just implementing a whistleblowing system. The emphasis should be on fostering a lifestyle awareness culture and understanding individual morality’s role in shaping ethical behaviour.

The study acknowledges its limitations, including its focus on a specific geographical and organisational context, which may affect the generalizability of the findings. Future research could expand to other regions and sectors, incorporating additional variables like auditor independence and internal control systems.

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