The Effect of Earnings Management on the Probability of Fraud and Financial Distress

The objective of this research is to examine the effect of earnings management on fraud, and its subsequent influence on the probability of financial distress. Hypothesis testing is conducted using the logistic regression method with a sample of listed companies in Indonesia Stock Exchange from 2009 to 2013. The sample of fraudulent companies is based on sanction decisions of the Indonesian Financial Service Authorities applied from 2009 to 2013. The results of this study show that earnings management increases the probability of fraudulent action. However, this study does not find that the increase in the probability of fraud will also increase the probability of financial distress.