Fraud prevention mechanism and their influence on performance of Islamic financial institutions / Reskino

There are many challenges that Islamic finance industry players need to anticipate and overcome. Important industry risks, such as disruptive technology, reputational damage, fraud, and cybercrime, have not been explicitly or adequately addressed in most of these reports. Such industrial risks can afflict the global financial sector, and of course, Islamic financial institutions (IFIs) will not be spared. To overcome industrial risks, especially fraud that occurs in IFIs, prevention efforts are needed before the fraud occurs. Fraud prevention mechanisms (FPM) have become an interesting area of research. There is a lot of current literature, which shows that studies on FPM have gained popularity among researchers for a very long time. Various models have been made, for example, fraud prevention efforts by implementing effective good corporate governance (GCG), but the model that links between working Islamically in financial institutions has not been widely studied. This study aims (1) to examine the effect of Islamic work ethics, corporate culture, risk management, internal control, GCG on the performance of IFIs in Indonesia and (2) how the role of FPM mediates the relationship between Islamic work ethics, corporate culture, risk management, internal control, GCG, and performance. This research is applied research by distributing questionnaires to IFIs in Indonesian with respondents such as Top/CEO/President/Managing Director and Finance Staff who work in Islamic banking and sharia insurance throughout Indonesia. Sampling was carried out on 87 respondents using the purposive sampling method. The data analysis method used in this research is Partial Least Square (PLS) – SEM. This study shows that internal control and GCG have a significant effect on the performance of IFIs in Indonesia. Meanwhile, Islamic work ethic, corporate culture, and risk management have not been able to significantly contribute to the performance of IFIs in Indonesia. Internal control and GCG through FPMs play an important role in improving the performance of IFIs in Indonesia. Furthermore, to fill the gaps in the previous literature, this study proposes the concept of the Heptagon fraud theory. Heptagon fraud theory continues the triangle theory and pentagon theory. The practical implication of this research is that the strong role of internal control GCG indicates that division heads, managers, and accounting staff must better understand the importance of their supervisory function to fulfil fiduciary obligations and responsibilities to stakeholders. This study contributes to the literature on the role of GCG in preventing fraud in IFIs. This study can provide insight for academics and practitioners in Indonesia and their international partners.