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Article
Publication date: 1 February 1998

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.

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Managerial Auditing Journal, vol. 13 no. 1
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 2 May 2017

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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2575

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
ISSN: 1359-0790

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Article
Publication date: 22 April 2009

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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1361

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.

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American Journal of Business, vol. 24 no. 1
Type: Research Article
ISSN: 1935-5181

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Article
Publication date: 4 November 2020

Ahmed Aboud and Barry Robinson

This paper aims to explore the effectiveness of fraud prevention and detection techniques, including data analytics, machine learning and data mining, and to understand…

Abstract

Purpose

This paper aims to explore the effectiveness of fraud prevention and detection techniques, including data analytics, machine learning and data mining, and to understand how widespread the use of data analytics is across different sectors and to identify and understand the potential barriers to implementing these techniques to detect and prevent fraud.

Design/methodology/approach

A survey was administered to 73 Irish businesses to determine to what extent traditional approach, data mining or text mining are being used to prevent or detect fraudulent financial reporting, and to determine the perception level of their effectiveness.

Findings

The study suggests that whilst data analytics is widely used by businesses in Ireland there is an under-utilisation of data analytics as an effective tool in the fight against fraud. The study suggests there are barriers that may be preventing companies from implementing advanced data analytics to detect financial statement fraud and identifies how those barriers may be overcome.

Originality/value

In contrast to the majority of literature on big data analytics and auditing, which lacks empirical insight into the diffusion, effectiveness and obstacles of data analytics, this explanatory study contributes by providing useful insights from the field on big data analytics. While the extant auditing literature generally addresses the avenues of big data utilisation in auditing domain, our study explores particularly the use big data analytics as a fraud prevention and detection techniques.

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Accounting Research Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1030-9616

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Publication date: 15 December 2011

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…

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.

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Article
Publication date: 3 June 2021

Mahmoud Lari Dashtbayaz, Mahdi Salehi and Mahdi Hedayatzadeh

This study aims to assess the relationship between internal control weakness and different types of auditor opinions in fraudulent and non-fraudulent firms. The study's…

Abstract

Purpose

This study aims to assess the relationship between internal control weakness and different types of auditor opinions in fraudulent and non-fraudulent firms. The study's main objective is to investigate fraud in business firms and analyze internal controls and types of proposed opinions by the auditor about his desired firm. The outbreak of fraud in firms is of utmost importance to a broad spectrum of society. Internal controls and the auditor's role in preventing and detecting frauds should not be taken for granted.

Design/methodology/approach

The present study's statistical population includes 179 listed firms on the Stock Exchange selected as the study sample using the systematic elimination method during 2012–2019. As the study's dependent variable (the type of auditor’s opinion), research hypotheses were analyzed using the Logit regression model.

Findings

The results show that the relationship between internal control weakness and opinion type is significantly different in fraudulent and non-fraudulent firms. Moreover, the relationship between internal control weakness and type of auditor opinion in fraudulent firms and the relationship between internal control weakness and type of auditor opinion in non-fraudulent firms are significant.

Originality/value

By assessing the related literature, the authors have found no study to directly assess the comparative relationship between internal control weakness and the type of auditor opinion, which can be named as the main objective of the study.

Details

Journal of Financial Crime, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1359-0790

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Article
Publication date: 7 August 2017

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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1021

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
ISSN: 0114-0582

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Book part
Publication date: 10 February 2020

Hakan Ozcelik

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

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
ISBN: 978-1-83867-636-0

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Article
Publication date: 20 August 2021

Vahab Rostami and Leyla Rezaei

This study aims to trace the impact of corporate governance and its mechanisms in preventing companies from turning to fraudulent financial reporting.

Abstract

Purpose

This study aims to trace the impact of corporate governance and its mechanisms in preventing companies from turning to fraudulent financial reporting.

Design/methodology/approach

For this purpose, using the systematic elimination pattern, the information of 187 listed companies on the Tehran Stock Exchange over six years from 2013 to 2019 were collected, and the hypotheses were examined using a linear regression model. To measure fraudulent financial reporting, the adjusted model of Beneish (1999) was used to evaluate corporate governance. Its mechanisms based on nine corporate governance mechanisms, including board independence, board remuneration, CEO financial expertise, expertise in CEO industry, board financial expertise, board industry expertise, board effort, CEO duality and managerial ownership, have been examined. These mechanisms are calculated as a combined index of corporate governance.

Findings

The findings indicate that robust corporate governance significantly reduces companies’ intention toward fraudulent financial reporting. In the same way, a negative and significant relationship was observed between each of the nine corporate governance mechanisms, except for board compensation and fraudulent financial reporting.

Originality/value

This study’s findings provide valuable insight into the importance of strengthening companies to prevent companies’ managers from engaging in fraudulent financial reporting activities. Hence, it is suggested that professional references bodies more seriously follow the rules to dictate to companies for using and empowering their corporate governance.

Details

Journal of Financial Crime, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1359-0790

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Book part
Publication date: 27 October 2016

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…

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
ISBN: 978-1-78560-973-2

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