Fraud diamond model which was raised by Wolfe and Hermanson (2004) has been one of models widely used to explain the motives and reasons of the perpetrators in committing fraud. The model consists of pressure, opportunity, rationalization, and the forth component added, which is capability. The capability component has become one big question mark for most of researchers regarding to its existence in fraud diamond model. Sridhar Ramamoorti, III, Koletar, and Rope (2013) stated that it remains unclear whether adding more factors is really helpful in assessing fraud risk, meanwhile Carcello and Hermanson (2008) stated a question whether the capability has an interaction with others components in fraud diamond. This research aimed to examine and get the empirical evidence regarding the effect of pressure, opportunity, and rationalization toward fraudulent financial reporting with capability as its moderating variable. Pressure was measured by ROA (Return on Assets), opportunity by change of CEO or CFO, rationalization by turn of auditor, capability by educational background of CEO or CFO, and fraudulent financial reporting by Beneish Model. This study uses 255 data of manufacturing company listed on Indonesia Stock Exchange in 2012-2016. The data analysis technique used in this study is logistic regression analysis. The result showed that pressure and opportunity have significant and positive effect toward fraudulent financial reporting, while rationalization does not have significant effect. This study also showed that capability was proved in moderating the effect of pressure and rationalization toward fraudulent financial reporting, while it was not proved in moderating the effect of opportunity toward fraudulent financial reporting.
Keywords: fraudulent financial reporting, fraud diamond, fraud triangle, capability