The Role of Foreign Ownership and ESG Factors in Mitigating Fraudulent Financial Reporting: Evidence from the Energy Sector

Abstract

Financial fraud continues to threaten financial market stability, particularly in the energy sector, where high capital intensity, complex transactions, and regulatory pressures increase the risk of fraudulent financial reporting (FFR). Although ESG disclosure has been promoted as a mechanism to strengthen corporate governance and reduce fraud risk, prior studies have produced inconsistent findings and have largely relied on composite ESG measures, leaving the distinct effects of each ESG dimension insufficiently understood. This study examines the effects of environmental, social, and governance disclosures on FFR and investigates whether foreign ownership strengthens these relationships in Indonesian energy companies. Using 98 observations from energy companies listed on the Indonesia Stock Exchange during 2022–2024, this study employs Moderated Regression Analysis (MRA). The results indicate that environmental and governance disclosures significantly reduce FFR, whereas social disclosure has no significant effect. Foreign ownership does not moderate the effects of the environmental and social dimensions but strengthens the effect of governance disclosure in reducing FFR, suggesting that foreign investors enhance governance effectiveness through stronger external monitoring. This study contributes to the literature by examining ESG dimensions separately rather than as a composite measure and by providing evidence on the role of foreign ownership as an external governance mechanism in mitigating fraudulent financial reporting in the Indonesian energy sector.