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Book part
Publication date: 10 February 2020

An Analysis of Fraudulent Financial Reporting Using the Fraud Diamond Theory Perspective: An Empirical Study on the Manufacturing Sector Companies Listed on the Borsa Istanbul

Hakan Ozcelik

Accounting-based financial scandals caused by fraudulent financial reports negatively affect the financial markets and cause loss of confidence in investors. Financial…

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Abstract

Accounting-based financial scandals caused by fraudulent financial reports negatively affect the financial markets and cause loss of confidence in investors. Financial reporting quality needs to be improved in order to build and maintain trust in financial markets. To increase the quality of financial reports, fraudulent financial reporting risks should be defined. At this point, regulators, practitioners, and researchers are in constant search.

There are improved approaches to the detection of financial reporting frauds in the literature. Many studies have been conducted on the “Fraud Triangle Theory” and the “Fraud Diamond Theory” approaches. The Fraud Triangle Theory argues that while fraudulent action is taking place in defining the elements of press, rationalization, and opportunity, the Fraud Diamond Theory approach argues that in order to achieve these three elements, the capability to carry out a fraud in individuals must be improved.

In this study, it is aimed to investigate the effect of Fraud Diamond elements on fraudulent financial reports. For the scope of the research, data of 26 companies from Manufacturing Industry enterprises operating in BORSA ISTANBUL between 2013 and 2017 were used. Financial reports of the companies are divided into two groups: (1) Fraudulent Financial Reports and (2) Non-Fraud Financial Reports. The hypotheses developed within the scope of the research were tested using the Logistic Regression analysis in IBM SPSS Statistic 20 program.

As a result of the study, it has been determined that there is a negative correlation between borrowing level, asset profitability, independent audit firm, auditor exchanges and institutionalization level, and fraudulent financial reports. It was understood that the change in assets and the size of the audit committee did not have any effect on the fraudulent financial reports.

Details

Contemporary Issues in Audit Management and Forensic Accounting
Type: Book
DOI: https://doi.org/10.1108/S1569-375920200000102012
ISBN: 978-1-83867-636-0

Keywords

  • Fraud
  • fraud auditing
  • fradulent financial reporting
  • fraud triangle
  • fraud diamond
  • Altman Z Score
  • logistic regression
  • M40
  • M41
  • M42

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Article
Publication date: 2 May 2017

Predicting fraudulent financial reporting using artificial neural network

Normah Omar, Zulaikha ‘Amirah Johari and Malcolm Smith

This paper aims to explore the effectiveness of an artificial neural network (ANN) in predicting fraudulent financial reporting in small market capitalization companies in…

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Abstract

Purpose

This paper aims to explore the effectiveness of an artificial neural network (ANN) in predicting fraudulent financial reporting in small market capitalization companies in Malaysia.

Design/methodology/approach

Based on the concepts of ANN, a mathematical model was developed to compare non-fraud and fraud companies selected from among small market capitalization companies in Malaysia; the fraud companies had already been charged by the Securities Commission for falsification of financial statements. Ten financial ratios are used as fraud risk indicators to predict fraudulent financial reporting using ANN.

Findings

The findings indicate that the proposed ANN methodology outperforms other statistical techniques widely used for predicting fraudulent financial reporting.

Originality/value

The study is one of few to adopt the ANN approach for the prediction of financial reporting fraud.

Details

Journal of Financial Crime, vol. 24 no. 2
Type: Research Article
DOI: https://doi.org/10.1108/JFC-11-2015-0061
ISSN: 1359-0790

Keywords

  • ANN
  • Fraud prediction models
  • Small market capitalization companies

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Article
Publication date: 22 April 2009

The Association Between Audit Committee Characteristics, the Contracting Process and Fraudulent Financial Reporting

Lisa A. Owens‐Jackson, Diana Robinson and Sandra Waller Shelton

In an effort to restore investor confidence in the wake of recent financial reporting scandals, the Sarbanes‐Oxley Act of 2002 mandates that audit committees be fully…

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Abstract

In an effort to restore investor confidence in the wake of recent financial reporting scandals, the Sarbanes‐Oxley Act of 2002 mandates that audit committees be fully independent and have at least one financial expert. The SEC adopted rules implementing these Sarbanes‐Oxley provisions. This paper contributes to the literature on the association between audit committee characteristics recommended by SOX and the likelihood of fraud in two ways. First, we focus on audit committee composition and the extent of the underlying nature of the firm (e.g., firm size, growth) and the contracting environment (e.g., managerial ownership, leverage) of the firm on the likelihood of fraud. In particular, we find that the likelihood of fraudulent financial reporting is negatively related to audit committee independence, number of audit committee meetings and managerial ownership and positively related to firm size and firm growth opportunities. Second, we separately examine firms with totally independent audit committees and fraudulent financial reporting. This sample is interesting because these are firms that had good corporate governance and yet still had fraudulent financial reporting. By separately examining firms with totally independent audit committees, we find that the likelihood of fraudulent financial reporting given a totally independent audit committee is inversely related to the level of managerial ownership and the number of audit committee meetings.

Details

American Journal of Business, vol. 24 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/19355181200900005
ISSN: 1935-5181

Keywords

  • Fraudulent reporting
  • Audit committees
  • Contracting process

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Article
Publication date: 1 February 1998

Fraud auditing

Rocco R. Vanasco

This paper examines the role of professional associations, governmental agencies, and international accounting and auditing bodies in promulgating standards to deter and…

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Abstract

This paper examines the role of professional associations, governmental agencies, and international accounting and auditing bodies in promulgating standards to deter and detect fraud, domestically and abroad. Specifically, it focuses on the role played by the US Securities and Exchange Commission (SEC), the American Institute of Certified Public Accountants (AICPA), the Institute of Internal Auditors (IIA), the Institute of Management Accountants (IMA), the Association of Certified Fraud Examiners (ACFE), the US Government Accounting Office (GAO), and other national and foreign professional associations, in promulgating auditing standards and procedures to prevent fraud in financial statements and other white‐collar crimes. It also examines several fraud cases and the impact of management and employee fraud on the various business sectors such as insurance, banking, health care, and manufacturing, as well as the role of management, the boards of directors, the audit committees, auditors, and fraud examiners and their liability in the fraud prevention and investigation.

Details

Managerial Auditing Journal, vol. 13 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/02686909810198724
ISSN: 0268-6902

Keywords

  • Auditing
  • Auditing guidelines
  • Ethics
  • Fraud
  • International accounting

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Article
Publication date: 1 October 2002

The stock market reaction to fraudulent financial reporting

Raymond A.K. Cox and Thomas R. Weirich

Explores the impact that recent fraudulent financial reporting has had on the capital markets. Attempts to examine the stock market reaction, both to return and risk, to…

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Abstract

Explores the impact that recent fraudulent financial reporting has had on the capital markets. Attempts to examine the stock market reaction, both to return and risk, to fraudulent financial reporting that has occurred in major corporations during the decade 1990‐1999. Finds that capital market impact is significant in dollar terms with strong negative announcement effects the day before and on the day of a news event. Concludes that auditor and regulator vigilance needs to be strongly maintained in monitoring firms’ financial reporting.

Details

Managerial Auditing Journal, vol. 17 no. 7
Type: Research Article
DOI: https://doi.org/10.1108/02686900210437471
ISSN: 0268-6902

Keywords

  • Financial reporting
  • Fraud
  • Capital markets

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Book part
Publication date: 15 December 2011

Fraudulent Financial Reporting: Corporate Behavior of Chinese Listed Companies

Jinyu Zhu and Simon S. Gao

Purpose – This study investigates the nature, types, and methods of fraudulent financial reporting committed by Chinese listed companies with a view to understanding…

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Abstract

Purpose – This study investigates the nature, types, and methods of fraudulent financial reporting committed by Chinese listed companies with a view to understanding corporate behavior relating to management fraud in China. Such an understanding is important for preventing frauds and achieving better financial reporting compliance.

Design/Methodology/Approach – This study adopts a descriptive research approach using the data based on 182 punishment bulletins issued by the China Securities Regulatory Commission from 2002 to 2006. The study considers three categories of frauds (i.e., false income statements, false balance sheets, and insufficient or false disclosure) and uses these categories to describe and analyze the fraud cases.

Research findings/Insights – Based on the sample of 83 cases over the 5-year period from 2002 to 2006, this study finds that all the frauds in the sample involved the manipulation, alteration, and falsification of reported financial information. Fraud schemes often contained more than one technique to misstate financial statements, typically through overstating revenues and assets, and understating liabilities and expenses. Most of the sample companies committed several frauds simultaneously. This study also reveals that most of the frauds committed by Chinese listed companies lasted more than 2 years, with the longest being 9 years, and common intervals between the initial fraud year and the announcement year of punishment were more than 3 years, with the longest being 11 years.

Theoretical/Academic implications – This study provides an empirical analysis of fraudulent financial reporting cases committed by Chinese listed companies. These cases were rarely studied in the Western literature. This study contributes to the extant literature by providing an insight into management fraud in China. Research into fraudulent financial reporting in the largest developing economy is certainly of interest as prior research into this area is mostly based on developed economies.

Practitioner/Policy implications – The implications drawn from this study could be useful for a better understanding of the management behavior of companies in developing and transitional economies. This study has a potential to assist regulators and accounting professional bodies to set guidelines facilitating corporate compliance of regulated financial reporting.

Details

Accounting in Asia
Type: Book
DOI: https://doi.org/10.1108/S1479-3563(2011)0000011008
ISBN: 978-1-78052-445-0

Keywords

  • Accounting profession
  • audit
  • Chinese listed company
  • financial irregularities
  • management frauds

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Book part
Publication date: 1 October 2015

Reporting Fraud: An Examination of the Bystander Effect and Evidence Strength

Alisa Brink, C. Kevin Eller and Huiqi Gan

We conduct an experiment to examine the occurrence of the bystander effect on willingness to report a fraudulent act. Specifically, we investigate the impact of evidence…

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Abstract

We conduct an experiment to examine the occurrence of the bystander effect on willingness to report a fraudulent act. Specifically, we investigate the impact of evidence strength on managers’ decisions to blow the whistle in the presence and absence of other employees who have knowledge of the wrongdoing. Results indicate that when there is strong evidence indicating a fraudulent act, individuals with sole knowledge are more likely to report than when others are aware of the fraudulent act (the bystander effect). However, the bystander effect is not found when evidence of fraud is weak. Further, a mediated moderation analysis indicates that perceived personal responsibility to report mediates the relation between others’ awareness of the questionable act and reporting likelihood, suggesting that the bystander effect is driven by diffusion of responsibility. Our results have implications for all types of organizations that wish to mitigate the detrimental effect of fraud. Specifically, training or incentives may be necessary to overcome the bystander effect in an organization.

Details

Advances in Accounting Behavioral Research
Type: Book
DOI: https://doi.org/10.1108/S1475-148820150000018004
ISBN: 978-1-78441-635-5

Keywords

  • Whistleblowing
  • fraud
  • bystander effect
  • diffusion of responsibility
  • evidence strength

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Article
Publication date: 26 October 2010

Fraudulent financial reporting and company characteristics: tax audit evidence

Juahir Mohd Nor, Norsiah Ahmad and Norman Mohd Saleh

The purpose of this paper is to examine the relationship between fraudulent financial reporting and firms' characteristics, i.e. size, type of ownership and audit quality…

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Abstract

Purpose

The purpose of this paper is to examine the relationship between fraudulent financial reporting and firms' characteristics, i.e. size, type of ownership and audit quality in companies audited by the Inland Revenue Board of Malaysia (IRBM) after the implementation of a self assessment system in Malaysia.

Design/methodology/approach

The paper employs an empirical research design, using data on companies audited by IRBM. The hypotheses of the study are tested using both univariate and multivariate statistical methods.

Findings

It was found that company size and audit quality have significant negative relationships with fraudulent financial reporting.

Research limitations/implications

The sample of companies used in this study is unlisted companies and the results are not generalisable to listed companies. Listed companies may have more stringent rules for listing and have better corporate governance mechanisms within the company as control.

Practical implications

The paper's findings may assist IRBM in identifying possible cases for audit in the future.

Originality/value

The paper describes the first empirical study that uses real tax cases where the non‐compliance with the Malaysian statues and tax laws are used as the measurement of the fraudulent financial reporting.

Details

Journal of Financial Reporting and Accounting, vol. 8 no. 2
Type: Research Article
DOI: https://doi.org/10.1108/19852511011088389
ISSN: 1985-2517

Keywords

  • Malaysia
  • Fraud
  • Financial reporting
  • Taxation
  • Auditing

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Book part
Publication date: 27 October 2016

Emotional Reactions to Financial Statement Fraud

Tara J. Shawver and Lynn H. Clements

Prior research suggests that evaluating employee reactions can help understand the human costs of unethical behavior. However, there is limited research exploring…

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Abstract

Prior research suggests that evaluating employee reactions can help understand the human costs of unethical behavior. However, there is limited research exploring emotional reactions to unethical behavior and no studies that explore emotional reactions when financial statement fraud occurs. In an attempt to fill a gap in the literature, the purpose of this study is to explore whether practicing accountants feel certain negative emotions when asked by a member of management to manipulate earnings. We find that practicing accountants feel emotions of anger, disappointment, and regret when asked by a member of management to complete an action that results in financial statement fraud. The implications of these findings are discussed.

Details

Research on Professional Responsibility and Ethics in Accounting
Type: Book
DOI: https://doi.org/10.1108/S1574-076520160000020005
ISBN: 978-1-78560-973-2

Keywords

  • Ethical decisions
  • emotions
  • earnings management
  • fraud

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Article
Publication date: 7 August 2017

Detecting fraud in Chinese listed company balance sheets

Yi Wei, Jianguo Chen and Carolyn Wirth

This paper aims to investigate the links between accounting values in Chinese listed companies’ balance sheets and the exposure of their fraudulent activities.

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Abstract

Purpose

This paper aims to investigate the links between accounting values in Chinese listed companies’ balance sheets and the exposure of their fraudulent activities.

Design/methodology/approach

Every balance sheet account is proposed to be a potential vehicle to manipulate financial statements.

Findings

Other receivables, inventories, prepaid expenses, employee benefits payables and long-term payables are important indicators of fraudulent financial statements. These results confirm that asset account manipulation is frequently carried out and cast doubt on earlier conclusions by researchers that inflation of liabilities is the most common source of financial statement manipulation.

Originality/value

Previous practices of solely scaling balance sheet values by assets are revealed to produce spurious relationships, while scaling by both assets and sales effectively detects fraudulent financial statements and provides a useful fraud prediction tool for Chinese auditors, regulators and investors.

Details

Pacific Accounting Review, vol. 29 no. 3
Type: Research Article
DOI: https://doi.org/10.1108/PAR-04-2016-0044
ISSN: 0114-0582

Keywords

  • China
  • Accounting ratios
  • Fraudulent statements

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