Misrepresentation of financial statements

Purpose – The purpose of this paper is to show the public, in general, and auditors, in particular, that in the absence of control there is always a risk of fraud. Fraud can be done in various forms. Larceny may be the most obvious case of fraud, but fraud may be done in many other ways too. Balance sheet fraud or financial statements fraud is a broader issue; it is far-fetched than a few hundred dollars of a larceny case. In financial statement fraud, the deep down effect may be millions or billions of dollars. Design/methodology/approach – The paper has been designed based on a fraud theory. The author has observed the implications of a possible fraud in a real audit case. The fraud theory has been tested through financial analysis and audit tests. The theory has then been revised and the existence of a financial statement fraud has been proven. Findings – The paper explores that banks and group companies controlled by unreliable owners can lead to misuse of public's funds in accordance with the directives of the owner. Public's money can be transferred to other group companies in an illegal manner – in excessive amounts – and never returned to the bank by means of applying different accounting fraud techniques. Research limitations/implications – Auditors, who may audit group companies that include a bank or banks with deposit receiving and lending rights, should pay attention to the transactions between the group's bank and the other group companies. The lending may be excessive in amount and/or never paid back and the financial statements would be misrepresented covering various fraud schemes. Originality/value – The case that the paper deals with reflects the author's own audit experiences. The names of the companies have been changed but not the essence of the events. From this perspective, it sheds light onto the path of an auditor who happens to be in a similar situation.

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Fintech in financial reporting and audit for fraud prevention and safeguarding equity investments

Journal of Accounting & Organizational Change ◽

10.1108/jaoc-09-2019-0098 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Paulina Roszkowska

Keyword(s):

Financial Reporting ◽

Financial Statements ◽

Financial Statement ◽

Financial Fraud ◽

Financial Statement Fraud ◽

Content Type ◽

Financial Scandals ◽

External Auditor ◽

Equity Investments

Purpose The purpose of this paper is to explore the audit-related causes of financial scandals and advice on how emerging technologies can provide solutions thereto. Specifically, this study seeks to look at the facilitators of financial statement fraud and explain specific fintech advancements that contribute to financial information reliability for equity investments. Design/methodology/approach The study uses the case studies of Enron and Arthur Andersen to document the evidence of audit-related issues in historical financial scandals. Then, a comprehensive and interdisciplinary literature review at the intersection of business, accounting and engineering, provides a foundation to propose technology advancements that can solve identified problems in accounting and auditing. Findings The findings show that blockchain, internet of things, smart contracts and artificial intelligence solutions have different functionality and can effectively solve various financial reporting and audit-related problems. Jointly, they have a strong potential to enhance the reliability of the information in financial statements and generally change how companies operate. Practical implications The proposed and explained technology advancements should be of interest to all publicly listed companies and investors, as they can help safeguard equity investments, thus build investors’ trust towards the company. Social implications Aside from implications for capital markets participants, the study findings can materially benefit various stakeholder groups, the broader company environment and the economy. Originality/value This is the first paper that seeks solutions to financial fraud and audit-related financial scandals in technology and not in implementing yet another regulation. Given the recent technology advancements, the study findings provide insights into how the role of an external auditor might evolve in the future.

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An Ensemble Model for Financial Statement Fraud Detection

10.3897/arphapreprints.e69590 ◽

2021 ◽

Author(s):

Ahmed M. Khedr ◽

Magdi El Bannany ◽

Sakeena Kanakkayil

Keyword(s):

Class Imbalance ◽

Fraud Detection ◽

Financial Statements ◽

Global Market ◽

Financial Statement ◽

Machine Learning Techniques ◽

Accounting Fraud ◽

Financial Statement Fraud ◽

Mena Region ◽

Ensemble Technique

Fraudulent financial statements are deliberate furnishing and/or reporting incorrect statistics, and this has become a major economic and social concern as the global market is witnessing an upsurge in financial accounting fraud, costing businesses billions of dollars a year. Identifying companies that manipulate financial statements remains a challenge for auditors, as fraud strategies have become increasingly sophisticated over the years. We evaluate machine learning techniques for financial statement fraud detection, particularly a powerful ensemble technique, the XGBoost algorithm, that help to identify fraud on a set of sample companies drawn from the MENA region. The issue of the class imbalance in the dataset is addressed by applying the SMOTE algorithm. We found that XGBoost algorithm outperformed other algorithms in this study: Logistic Regression (LR), Decision Tree (DT), Vector Machine Support (SVM), Adaboost, and RandomForest. The XGBoost algorithm is then optimised to obtain the optimum performance.

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THE VALUE OF RESTATEMENT TO FRAUD PREDICTION

Journal of Business Economics and Management ◽

10.3846/jbem.2019.10489 ◽

2019 ◽

Vol 20 (6) ◽

pp. 1210-1237

Author(s):

Shi Qiu ◽

Hong-Qu He ◽

Yuan-sheng Luo

Keyword(s):

Balance Sheet ◽

Financial Statements ◽

Primary Objective ◽

Financial Statement ◽

Financial Statement Fraud ◽

Financial Reports ◽

Financial Report ◽

Financial Restatements ◽

Fraud Prediction ◽

Different Characteristics

A financial report restatement reflects errors in the previous financial statement, and thus it increases investors’ doubt about the credibility of the financial statement. The primary objective of this paper is to examine whether restatement announcements imply increased fraud risks in Chinese firms in the context that up to one quarter of listed companies have restated their financial reports in China, and explore the implications of the content, severity and reasons for restatements with respect to fraud. In this paper, firms with financial restatements prove to be more likely to be labeled as fraudulent by regulators in China. Second, the following results also are revealed: (1) financial statements, except balance sheet restatements, provide insights into the revelation of fraudulent behaviors, (2) the severity of restatements is positively correlated with future fraud disclosures, and (3) restatements due to negligence are positively correlated with future fraud occurrences. These results imply that restatement announcements and their different characteristics provide important information for detecting financial statement fraud.

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Using Beneish model to detect corporate financial statement fraud in Greece

Journal of Financial Crime ◽

10.1108/jfc-11-2014-0055 ◽

2016 ◽

Vol 23 (4) ◽

pp. 1063-1073 ◽

Cited By ~ 3

Author(s):

Spyridon Repousis

Keyword(s):

Stock Exchange ◽

Banking System ◽

Limited Liability ◽

Growth Index ◽

Financial Statements ◽

Financial Statement ◽

Financial Statement Fraud ◽

Gross Margin ◽

Data Set ◽

Content Type

Purpose This paper aims to investigate empirically the eight-variables Beneish M-model to identify occurrence of financial statement fraud or tendency to engage in earning manipulation. Design/methodology/approach A data set of 25,468 companies (Société Anonyme and Limited Liability Companies) in Greece was analyzed during two-year period of 2011-2012. Financial statements of banks are excluded. Findings The results showed that 8,486 companies or 33 per cent of the whole sample has a greater than −2.2 score, which is a signal that companies are likely to be manipulators. Also, for manipulators, results using F-distribution showed that days sales in receivable index (DSRI), asset quality index (AQI), depreciation index, selling, general and administrative expenses index (SGAI), total accruals to total assets index and leverage index (LVGI) are significant at 99 per cent confidence level in its effect on Beneish M-score. Also, there is a significant relationship between earning management, as expressed by Beneish M-score and each one of variables, DSRI, AQI, gross margin index, sales growth index, SGAI and LVGI. Most of all, DSRI explains 95.92 per cent of the variation in Beneish M-score in statistical terms. Practical implications Results are important for banking system, because financial statements information influence credit decisions of banks. Debt agreements include terms based upon accounting numbers. Also, using Beneish Model, it is a cheap and easy way for examiners of possible fraudulent activity. Originality/value To the best of the author’s knowledge, there is a great lack of research in Greece, using Beneish model. There is only one more study using the Beneish model, examining only a few companies listed in Athens Stock Exchange during 1999-2000. Findings have also important implications not only for banks but also for users of Greek financial statement accounts, especially to investors, auditors, regulators, to taxation and other state authorities.

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The roles of whistleblowing system and fraud awareness as financial statement fraud deterrent

International Journal of Ethics and Systems ◽

10.1108/ijoes-09-2020-0140 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Nanang Shonhadji ◽

Ach Maulidi

Keyword(s):

Capital Investment ◽

Financial Statements ◽

Financial Statement ◽

Theoretical Discussion ◽

Financial Statement Fraud ◽

Accounting Firms ◽

Content Type ◽

Effective Deterrent ◽

Fraudulent Financial Statements

Purpose This paper aims to provide new theoretical discussion about the role of whistleblowing system and fraud awareness as an effective deterrent for financial statement fraud. Design/methodology/approach The authors conducted surveys to 13 reputable public accounting firms in East Java, Indonesia. Findings It is well acknowledged, as fraud attacks grow more sophisticated, whistleblowing system and fraud awareness can be possible deterrents. By increasing employees’ fraud awareness, they do not only recognise fraud symptoms and typologies but also support to raise concerns in good faith and on reasonable grounds. This study also suggests the role of fraud awareness as a human capital investment that increase sensitivity on identifying fraud symptoms and discouraging participation in crimes. Originality/value This study produces new theoretical discussion about fraud prevention. Then this study also offers several aspects that can help organisation to establish effective whistleblowing systems and reporting mechanisms. Those aspects identified can encourage an individual to report malpractice or wrongdoing. This study also offers how fraud awareness can support the implementation of whistleblowing system in preventing fraudulent financial statements and other irregularities.

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ANALISIS FAKTOR-FAKTOR YANG MEMPENGARUHI TERJADINYA FINANCIAL STATEMENT FRAUD: PERSPEKTIF DIAMOND FRAUD THEORY (Studi Pada Perusahaan Perbankan Yang Terdaftar Di Bursa Efek Indonesia Periode 2014-2016)

JURNAL AKUNTANSI DAN AUDITING ◽

10.14710/jaa.v14i2.19774 ◽

2018 ◽

Vol 14 (2) ◽

pp. 118

Author(s):

Nella Kartika Nugraheni ◽

Hanung Triatmoko

Keyword(s):

Financial Stability ◽

Stock Exchange ◽

Financial Statements ◽

External Pressure ◽

Financial Statement ◽

Variable Pressure ◽

Financial Statement Fraud ◽

Audit Opinion ◽

Fraud Theory ◽

Financial Need

This study aimed to analyze the factors that encourage financial statement fraud with analysis of diamond fraud theory. This research analyzes the influence of variable pressure proxied by financial targets, financial stability, external pressure, personal financial need, the opportunity proxied by nature of industry, ineffective monitoring, razionalization proxied by audit opinion, and the capability to replace any directors proxies against financial statements fraud. The sample in this research are 105 samples of banking companies listed on Indonesia Stock Exchange in the period 2014-2016. The results showed that the variable of financial targets as measured by return on asset, external pressure as measured by the leverage ratio, personal financial need as measured by the ownership of shares by the board of commission influence the financial statements fraud. The study did not found financial stability pressures as measured by the ratio of change total asset, ineffective monitoring as measured by the ratio of affiliated commissioner, nature of industry as measured by the ratio of change receivables, the audit opinion as measured by obtaining unqualified opinion with explanatory language, and capability as measured by changes of directors influence on fraudulent financial statements.

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ANALISIS PENDETEKSIAN KECURANGAN PADA LAPORAN KEUANGAN

Behavioral Accounting Journal ◽

10.33005/baj.v3i1.60 ◽

2020 ◽

Vol 3 (1) ◽

pp. 55-72

Author(s):

Wiwi Idawati

Keyword(s):

Professional Ethics ◽

Simple Random Sampling ◽

Financial Statements ◽

Financial Statement ◽

Research Subjects ◽

Financial Statement Fraud ◽

Professional Skepticism ◽

Accounting Firm ◽

The Public ◽

Analysis Technique

The accounting profession is often associated with cases of financial statement fraud. The purpose of this study is to examine the effect of professional ethics, auditor experience, auditor professional skepticism on the detection of auditor fraud. The research method uses associative surveys with quantitative data and Likert scale. The research subjects used auditors from the Public Accounting Firm (KAP) in the Central Jakarta and South Jakarta areas as the population using the simple random sampling method. Unit samples were obtained by 92 respondents from 30 KAP. The analysis technique uses multiple linear regression with SPSS 22. The results of the study prove that professional ethics, auditor experience, and skepticism from auditor professionals have a large impact on detecting fraud in the preparation of financial statements. Future studies can increase the number of samples and add other independent variables that have an effect on the auditor when he sees manipulation in the financial statements.

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Real earnings management and financial statement fraud: evidence from Malaysia

International Journal of Accounting and Information Management ◽

10.1108/ijaim-03-2017-0039 ◽

2018 ◽

Vol 26 (4) ◽

pp. 508-526 ◽

Cited By ~ 5

Author(s):

Noorul Azwin binti Md Nasir ◽

Muhammad Jahangir Ali ◽

Rushdi M.R. Razzaque ◽

Kamran Ahmed

Keyword(s):

Earnings Management ◽

Cash Flow ◽

Design Methodology ◽

Production Costs ◽

Real Earnings Management ◽

Financial Statement ◽

Financial Fraud ◽

Financial Statement Fraud ◽

Content Type

Purpose We examine whether the fraud firms are engaged in real earnings management and accrual earnings management prior to the fraud year in the Malaysian context. Design/methodology/approach Our sample comprises of 65 financial statement fraud and 65 non-fraud firms over a period of eight years from 2001 to 2008. Findings Using the abnormal cash flow from operations (CFO) and abnormal production costs as the proxies for real earnings management, we find that financial statement fraud firms engage in manipulating production costs during preceding two years of the fraud event. However, our results show that financial fraud firms engage in manipulating CFO prior to the fraud event. Additionally, we find that financial statement fraud firms prefer to manipulate earnings using accruals relative to real earnings prior to the fraud year. Originality/value Our results demonstrate that real earnings management is more aggressive in financial statement fraud firms compared to the non-fraud firms in the four years prior to fraud.

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ANALISIS FAKTOR-FAKTOR YANG MEMPENGARUHI TERJADINYA FINANCIAL STATEMENT FRAUD: PERSPEKTIF DIAMOND FRAUD THEORY (Studi Pada Perusahaan Perbankan Yang Terdaftar Di Bursa Efek Indonesia Periode 2014-2016)

JURNAL AKUNTANSI DAN AUDITING ◽

10.14710/jaa.14.2.118-143 ◽

2018 ◽

Vol 14 (2) ◽

pp. 118

Author(s):

Nella Kartika Nugraheni ◽

Hanung Triatmoko

Keyword(s):

Financial Stability ◽

Stock Exchange ◽

Financial Statements ◽

External Pressure ◽

Financial Statement ◽

Variable Pressure ◽

Financial Statement Fraud ◽

Audit Opinion ◽

Fraud Theory ◽

Financial Need

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Culpable insiders – the enemy within, the victim without

Journal of Financial Crime ◽

10.1108/jfc-11-2013-0068 ◽

2014 ◽

Vol 21 (3) ◽

pp. 310-320 ◽

Cited By ~ 4

Author(s):

Jeffrey Simser

Keyword(s):

At Risk ◽

Case Studies ◽

Design Methodology ◽

Financial Statement ◽

Control Mechanisms ◽

Financial Statement Fraud ◽

First Line ◽

Content Type ◽

Screening Procedures

Purpose – The purpose of this paper is to explore the role of the culpable insider and the predatory criminal in fraud and deception. Design/methodology/approach – Two groupings of fraud are considered in this paper. Insider fraud consists of a person within an organization misusing their position for corrupt self-dealing, asset misappropriation and financial statement fraud. Case studies are discussed, offering differing perspectives on the role of insiders. Fraudsters use technology, like malware, to take on the mantle of an insider to facilitate their larceny. This paper also looks at the role of the insider with predatory frauds. Findings – Most enterprises, be they public entities or private firms, are at risk of internal fraud. Internal financial controls are the first line of defence. In tougher economic times, when enterprises run on the tightest of margins, control mechanisms are at risk of being weakened at the altar of efficiency. Firms can also adopt cultures that deter frauds, either through policies on whistle-blowers or through simple employee screening procedures. For predatory frauds, the basic warning flag can be summed up with the cliché: if something seems too good to be true, it probably is. Originality/value – This paper synthesizes research on fraud and the role that an insider can play as well as the role of a predatory fraudster.

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