Can Investors Detect Fraud Using Financial Statements: An Exploratory Study

This study aims to analyze financial leverage, liquidity and profitability of financial fraud statements in banking companies. Financial statement fraud (fraudulent financial statements) as an intentional or unintentional act or act, which causes financial statements to be materially misleading. The population used in this study is a banking company, while the sample used in this study is the financial statements of banking companies listed on the Indonesia Stock Exchange from 2015 - 2017. This research is a causative research, namely research designed to measure the relationship between variables research, or analyze the influence of a variable on other variables. Research design is a framework used in a study. The results of this research financial leverage have a significant effect on financial statement fraud. Liquidity has a significant effect on financial statement fraud. Profitability has no significant effect on financial statement fraud. Simultaneously financial leverage, liquidity and profitability together have a significant effect on financial statement fraud.

This paper explores three questions related the SEC's accounting enforcement program: (1) what types of accounting and auditing motivate enforcement actions, (2) what are the consequences of investigations on targets' financial statements, managers, and auditors, and (3) how do investors and other market agents view the SEC's actions? The SEC enforcement program, which consists of investigations and subsequent injunctive actions or administrative proceedings against offending registrants and auditors, is designed to concentrate on particular problem areas and anticipate emerging problems (SEC [1989, p. 1]). The potential for SEC enforcement actions provides incentives for corporate officers and independent CPAs avoid unacceptable practices whose effective prosecution is

Motivated by methods used to evaluate the quality of data, we create a novel firm-year measure to estimate the level of error in financial statements. The measure, which has several conceptual and statistical advantages over available alternatives, assesses the extent to which features of the distribution of a firm’s financial statement numbers diverge from a theoretical distribution posited by Benford’s Law. After providing intuition for the theory underlying the measure, we use numerical methods to demonstrate that certain error types in financial statement numbers increase the deviation from the theoretical distribution. We corroborate the numerical analysis with simulation analysis that reveals that the introduction of errors to reported revenue also increases the deviation. We then provide empirical evidence that the measure captures financial statement data quality. We first show the measure’s association with commonly used measures of accruals-based earnings management and earnings manipulation. Next, we demonstrate that (1) restated financial statements more closely conform to Benford’s Law than the misstated versions in the same firm-year and (2) as divergence from Benford’s Law increases, earnings persistence decreases. Finally, we show that our measure predicts material misstatements as identified by SEC Accounting and Auditing Enforcement Releases and can be used as a leading indicator to identify misstatements.

PurposeThe purpose of this study is to investigate whether the likelihood that a firm will face financial statement fraud litigation is affected by the disclosure of internal control material weaknesses (MW) and the “busyness” of a firm’s board of directors.Design/methodology/approachThe results are derived from logistic regression models and data are collected from the Audit Analytics database augmented by data from CompuStat, the Stanford Law School website and the SEC Accounting and Auditing Enforcement Releases. The authors also test for endogeneity with a propensity score matching procedure.FindingsThe authors find that an MW report is strongly associated with the likelihood of subsequent financial statement fraud litigation, and that the influence of entity-level MW on litigation likelihood is stronger than that of account-level MW. Moreover, the number of outside board directorships significantly increases the influence of entity-level MW on the likelihood of litigation, indicating that board of directors’ busyness significantly increases the risk of litigation.Originality/valuePrevious research notes that board members holding multiple directorships cannot effectively oversee the financial reporting process and, thus, are associated with poorer governance. The authors extend this implication of board busyness to the association between disclosure of MW type and the filing of subsequent litigation alleging financial statement fraud. To the best of the authors’ knowledge, no other research has done so.

This study examines the relationship between board characteristics and the likelihood of fraud in financial statements in the Saudi stock exchange as one of the emerging markets. Financial statements of 67 companies listed on the Saudi Stock Exchange have been collected over six years from 2014 to 2019. The modified Beneish M-score model (Beneish in Financ Anal J 55(5):24–36, 1999) has been used to measure fraudulent financial statements. Panel data techniques have been used to examine the relationship between financial statement fraud and four characteristics of the board: independence, size, meetings frequency, and gender diversity. The findings indicate that the likelihood of fraud in financial statements is negatively and significantly related to board independence and it is positively and significantly related to the board size. The results also indicate that the representation of women on the board and the frequency of meetings have no significant relationship with the likelihood of fraud in the financial statements. The results of this study provide insight into the importance of corporate governance mechanisms, including the board of directors, in preventing corporate managers from engaging in fraudulent financial reporting activities. In emerging markets such as the Saudi Stock Exchange, financial statements are the main and almost the only source of information about the company. Therefore, examining the factors that reduce financial statement fraud in these markets is important.

PurposeThis paper builds on the Committee of Sponsoring Organizations (COSO) Report, which examined US Accounting and Auditing Enforcement Releases (AAERs). The purpose of this paper is to provide valuable insights into the characteristics and realities of financial statement fraud in the post‐Enron regulatory environment.Design/methodology/approachThis paper analyses a sample of AAERs from 2002 to 2005. It also provides case studies of an additional five high‐profile case studies from that period.FindingsThis paper finds evidence of changes in Securities and Exchange Commission (SEC) enforcement activities since the COSO Report. Specifically, it is found that enforcement activities have increased substantially post‐Enron and the companies subject to AAERs are, on average, much larger, more profitable and the frauds are more substantial than those exhibited in the COSO Report. These findings suggest that the SEC has become more aggressive at pursuing larger companies for financial statement fraud in the post‐Enron environment.Research limitations/implicationsThis paper relies on AAERs as the source of analysis of financial statement fraud, its findings must be viewed in light of the limitations of using these documents. Specifically, the prevailing prosecutions agenda of the US SEC may be reflected in these results.Practical implicationsThe study findings are of great practical relevance to accounting regulators and practitioners as they provide valuable insights into the nature and characteristics of financial statement fraud.Originality/valueThe paper provides empirical evidence concerning the changing face of financial statement fraud enforcement and provides a more in‐depth comparison of fraud than possible with most previous studies that have tended to focus on quantitative measures. This is possible because the present investigation utilises qualitative data from AAERs to supplement quantitative findings. Its originality is also due to the use of institutional theory which is not commonly applied in the corporate governance field.

<span>This paper provides insight into several descriptive issues that help clarify the nature of management fraud in the banking and financial services industry. The SECs Accounting and Auditing Enforcement Releases (AAER) Nos. 1 to 400, published between 1984 and 1992, were surveyed to identify a sample of banks and other related entities that were the subject of SEC enforcement action for fraudulent financial reporting. Those cases are analyzed and results are reported in this study. Detailed cases are also presented to illustrate the nature of financial statement fraud relating to valuation problems in investment accounts, misstatement of loan reserves, and non-disclosure of material financial information. Implications for research, practice, and teaching and presented.</span>

The problem of financial fraud has always been a key issue of concern for researchers at home and abroad, and financial fraud of listed companies occurs from time to time at home and abroad, which produces a huge loss of interest for investors as well as the downturn and instability of the capital market, for this reason, it is necessary to carry out a study on the detection of financial fraud. This paper analyzes the financial fraud detection of Chinese listed companies by establishing a Logit model, firstly, obtain the financial statement sample data of Chinese listed companies from CSMAR, and divide the sample into training set and test set with the ratio of 9:1 to preprocess the sample data and fill in the missing values; secondly, this paper selects the financial statement data, and based on the previous research, selects the characteristics that are related to the risk of financial fraud and constitute the risk of financial fraud. high features, and constitute the feature indicators for financial fraud detection; again, since detecting financial fraud is a binary classification problem, the sample is divided into fraudulent companies and normal companies, so this paper studies the financial fraud problem through the discrete choice model in the econometric model, constructs a Logit model, conducts a goodness-of-fit test on the sample data of CSMAR, and estimates the parameters using the method of maximum likelihood estimation ; finally, the test set data is used to test the model's ability to predict financial fraud.

As the monetary cost of fraud escalates globally, and the ensuing confidence in financial markets deteriorates, the international demand for quality in financial statements intensifies. But what constitutes quality in financial statements? This book examines financial statement fraud, a topical and increasingly challenging area for financial accounting, business, and the law. Evidence shows that accounting anomalies in an organization’s financial statements diminish the quality and serviceability of financial information. However, an anomaly does not necessarily signal fraud. Financial statement fraud is intended to mislead shareholders and other stakeholders. In this book, elements that underpin diversity of accounting anomalies likely found in fraudulent financial accounting statements are revealed. Multiple research methods are used in the analysis of selected international fraud cases, each illustrating examples of financial statement fraud, including: revenue recognition, overstatement and/or misappropriation of assets, understatement of expenses and liabilities, disclosure fraud, bribery and corruption. Additionally, the phoenix phenomenon with regard to fraud in financial accounting is investigated. Drawing on documented observations of commercial and legal cases globally this study highlights the necessity for continued development of financial audit practices and other audit services.

Many companies produce public financial statements as part of their annual accounts. These financial statements are audited by the Financial Supervisory Service (FSS) in Korea to identify their financial transparency (1). However, even if financial risk has been evaluated using fraud symptom analysis, fraudulent acts committed by fabricating financial statements and transactions may lead to creative accounting. The adverse impact of financial fraud is rapidly increasing worldwide; it affects both individuals and national economic systems. For example, fraudulent companies may be unable to raise funds; in the worst case, they may go into bankruptcy. Generally, the financial accounts of companies exist as digital accounting data in computer system. Database systems efficiently manage this digital data. Therefore, we are conducting research on digital forensic accounting to detect fraud factors in financial transactions. In this paper, we suggest methodologies for forensic accounting investigation. We explain the process and cycle of financial fraud investigation. We also propose forensic accounting techniques that can detected the fraud factors. The techniques are representatively included in a covert resource detection system. This uses financial and business data extraction techniques in the company's server, a data acquisition tool in an external file server, a forensic accounting tool to detect financial fraud factors.

Fraud is an act to gain profit through asset misappropriation, manipulation of financial statements and corruption. Fraud by manipulating financial statements has a lower intensity than fraud in the form of asset abuse and corruption, but has a very large loss impact. This study aims to measure whether corporate governance can reduce the level of financial statement fraud with the triangle model. The independent variables are pressure, opportunity, rationalization and the dependent variable is financial statement fraud. The population in this study are companies listed on the Sri Kehati stock index of the Indonesia Stock Exchange (IDX) in 2017-2021. The data analysis technique uses multiple linear regression. The results of the analysis of this study are that there is a positive and significant influence between financial stability, Ineffective Monitoring (BDOUT) Rationalization (TATA) on financial statement fraud. There is a negative and significant influence between External Pressure (LEV), Personal Financial (Oship) Financial Target (ROA) on fraudulent financial statements. There is no influence between the Nature of Industry (REV), the Audit Committee (KA) on fraudulent financial statements. The audit committee is able to weaken the effect of rationalization on financial statement fraud. The audit committee is able to strengthen the effect of rationalization on fraudulent financial statements. The audit committee was unable to moderate the effect of External Pressure (LEV) on fraudulent financial statements. The audit committee was unable to moderate the effect of financial targets on fraudulent financial statements. The audit committee is not able to moderate the effect of inefficient monitoring on financial statement fraud.

Pentagon fraud is one type of financial fraud that occurs in companies. Pentagon fraud occurs when a company hides or deceives financial statements to reduce the amount of taxes it must withhold or to increase the value of the company for investors report. The purpose of this study was to examine and analyze the effect of the pentagon fraud variable on financial statement fraud with the dependent variable proxy being F-Scores. While the independent variables used in this study are financial stability (ACHANGE), financial target (ROA), nature of industry (RECEIVABLE), ineffective monitoring (BDOUT), change in auditor (CPA), change in directors (DCHANGE), and the frequent number of the CEO's picture (CEOPIC). This research use samples of consumption sector companies listed on the Indonesia Stock Exchange (IDX) for the period 2016–2020. By using purposive sampling, there are 55 samples from 11 companies. The data analysis method used multiple linear regression analysis, with hypothesis testing t-test, f-test, descriptive test, coefficient of determination. The results of this research shows that financial stability, ineffective monitoring, change in auditor, and change in direction have no significant influence on financial fraud statements. But financial target, nature of industry, and frequent number of CEO's picture have significant influence on financial fraud statement.

Financial statements are the final result of the accounting process that contains company financial information presented to both internal and external parties. External parties such as investors use these financial statements as a tool in making investment decisions. Currently, many competing companies show improved performance through financial statements. The necessity to continue to make improvements and improve performance in order to get a good impression from various parties, especially investors, is one of the incentives that force company management to manipulate financial statements. This study aims to detect fraud or financial statement fraud with the influence of Nature of Industry, Change in Director, Frequent Number of CEO's Picture factors in manufacturing companies on the IDX (Indonesia Stock Exchange) for the 2020-2022 period, using the F-Score model. Method the data used is secondary data obtained from the company's financial and annual statements. This study used a purposive sampling technique obtained by 12 companies. The data analysis technique used in this study is logistics regression analysis using SPSS 25 software. The results of this study show that the variables External Pressure and Change in Auditor partially have a significant negative effect on the dependent variable. While Nature of Industry, Change in Director, Frequent Number Of CEO's Picture partially shows positive for the dependent variable. Simultaneously, all variables have a significant negative effect on financial statement fraud

F raud in financial statements is a problem that cannot be underestimated. From year to year, cases of fraud are always found. In this case, the role of the auditor profession is needed to detect the possibility of fraud as early as possible, so as to prevent fraud and possibly prolonged scandals. When there is a material misstatement in the financial statements, the information is irrelevant as a basis for decision making because the analysis is not based on actual information. T hi s study aims to analyze the effect of pressure on indications of financial statement fraud, analyze the effect of opportunity on indications of financial statement fraud, analyze the effect of rationalization on indications of financial statement fraud and analyze the effect of capability on indications of report fraud. plantation companies listed on the Indonesia Stock Exchange. The sample in the study was 16 companies during the period 2015 to 2019. The analysis technique used logistic regression analysis. T h e results of the analysis show that pressure, which is proxied by ROA, has a significant effect on the indication of fraudulent company financial statements. The opportunity has a significant effect on the indication of fraud in the company's financial statements. Rationalization has no effect on indications of fraud in corporate financial statements. The capability has no effect on indications of fraudulent corporate financial statements.

Financial statement fraud is an intentional act by certain parties in manipulating financial numbers on financial statements so that the disclosure of information is not appropriate. To detect such fraud, several approaches can be taken through financial target, nature of industry, earnings growth, and change in directors. The purpose of this study is to examine the influence of the new fraud diamond model on financial statement fraud as measured by the Beneish M-Score model. The population in this study uses manufacturing companies listed on the Indonesian Sharia Stock Index (ISSI) from 2018-2021. In selecting the sample for this study, purposive sampling techniques were used in accordance with the research criteria, resulting in 20 companies with 80 research data. Data analysis techniques use panel data regression with the help of Microsoft Excel software and E-views statistical tool version 12. The results of this study indicate that financial target, nature of industry, and change in directors do not have a significant effect on financial statement fraud, while earnings growth has a negative and significant effect on financial statement fraud. Therefore, this study can be said to support the new fraud diamond model in financial statement fraud. Keywords: Financial Statement Fraud, New Fraud Diamond Model, Beneish M-Score ABSTRAK Kecurangan financial statement merupakan tindakan kesengajaan oleh pihak tertentu dalam memanipulasi angka-angka pada laporan keuangan sehingga pengungkapan informasi tidak sesuai. Untuk mendeteksi kecurangan tersebut dapat dilakukan dengan beberapa pendekatan melalui financial target, nature of industry, earnings growth dan change in directors. Tujuan penelitian ini untuk melihat pengaruh model new fraud diamond terhadap kecurangan financial statement yang diukur dengan model Beneish M-Score . Populasi dalam penelitian ini menggunakan perusahaan manufaktur yang tercatat dalam Indeks Saham Syariah Indonesia (ISSI) 2018-2021. Dalam pemilihan sampel penelitian ini menggunakan teknik purposive sampling yang telah sesuai dengan ketentuan kriteria penelitian, sehingga terdapat 20 perusahaan dengan data penelitian sebanyak 80. Tekhnik analisis data menggunakan regresi data panel dengan bantuan software microsoft excel dan alat statistik E-views versi 12. Hasil penelitian ini menunjukan bahwa financial target, nature of industry dan change in directors tidak berpengaruh signifikan terhadap kecurangan financial statement, sedangkan pada earnings growth berpengaruh negatif dan signifikan terhadap kecurangan financial statement. Oleh karena itu, penelitian ini dapat dikatakan mendukung model new fraud diamond dalam kecurangan laporan keuangan Keywords: Kecurangan Laporan Keuangan, Model New Fraud Diamond, Beneish M-Score