Fraud Companies Research Articles

Analisis Fraud Pentagon terhadap Kecurangan Laporan Keuangan (Studi Empiris pada Perusahaan yang terdaftar di Bursa Efek Indonesia pada Tahun 2011-2020)

This research aims to detect fraudulent financial reports using the fraud pentagon. The research uses elements in the form of financial targets, financial instability, number of independent commissioners, special party receivable transactions, special party debt transactions, special party sales transactions, special party purchase transactions, change of auditors, change of directors, and number of CEO photos. The sample in this research is 108 companies listed on the Indonesia Stock Exchange for the 2011-2020 period which were selected using a purposive sampling method. The sample companies in this study consisted of 54 fraud companies and 54 non-fraud companies. In testing the hypothesis using logistic regression analysis using the SPSS test tool. The results of this research show that financial targets and financial instability are not the driving factors for management to commit financial statement fraud, receivables transactions with privileged parties are a driving factor for fraud, but this is not the case for debt, sales and purchase transactions with privileged parties. Likewise, changing auditors in a particular financial year is also a driving factor for fraud, but not changing directors. Finally, the number of directors' photos in the annual report is not a driving factor in financial statement fraud.

Analysis of Factors Influencing Fraudulent Financial Statements: Pentagon Fraud Perspective and Managerial Ownership

Financial statement fraud poses a significant threat to the integrity of financial reporting and investor confidence so will become a threat to sustainability and business continuity. This study aims to analyze the factors that influence fraudulent financial statements from the perspective of the Pentagon fraud theory and managerial ownership. The fraud pentagon model consists of financial target, financial instability, independent commissioners, receivable related party transactions, debt related party transactions, change of auditor, change of directors, number of CEO photos and adding other variable managerial ownership. The population of this research is 108 companies on the IDX for the 2011-2020 period using a purposive sampling method. The sample consists of 54 fraud companies and 54 non-fraud companies. The research results prove that receivables related party transactions and changing auditors have positive effect on financial statement fraud. Meanwhile, the variables of financial target, financial instability, independent commissioner, debt related party transactions, change of directors, number of CEO photos and managerial ownership have no effect on financial report fraud.

The Role of Audit Report Lag in Mediating the Effect of Auditor Switching and Financial Distress on Financial Statement Fraud

This paper examines the effect of auditor switching and financial distress on financial statement fraud with audit report lag as the intervening variable. This research used 26 fraud companies and 45 non-fraud companies listed by Indonesia Stock Exchange that break the article VIII.G.7 and IX.E.2 issued by Financial Services Authority in 2020. This quantitative research used Partial Least Square (PLS) with WarpPLS 7.0 tools. We conclude that financial distress and audit report lag directly affect Financial Statement fraud. It also shows that audit report lag partially mediates the relationship between financial distress and financial statement fraud

Fraud Feedback Detection using Machine Learning Technique

In the era of e-commerce, people often purchase the most of product from online shopping websites, customers rely on the number of reviews and stars of product to choose the right product for them. Fraud companies also pay to fraudsters to increase the rating of product, this tends to mislead the people and people end up with the product that they are not satisfied with. This can be stopped in some extent with the help of machine learning algorithms. The purposed method uses Machine Learning Algorithm like Random Forest, ANN, Support Vector Machine which helps the people to differentiate between fraud feedbacks and original reviews.

Financial Statement Fraud: Evidence from Malaysian Public Listed Companies

Financial statement fraud is seen as a rampant problem around the world. Early detection is one of the ways to curb financial statement fraud, and it has motivated this study to be conducted. The main objective of this study is to investigate the primary factors that influence the public listed companies in Malaysia to be involved in financial statement fraud. The sample used in this study comprised 40 financial statement fraud companies matched with another 40 non-financial statement fraud companies listed in Bursa Malaysia from 2003 to 2020. This study used the fraud triangle theory to form the research framework and develop the research hypotheses. Four hypotheses based on the elements of fraud, which are the financial target, external pressure, earnings management, and related-party transaction, have been developed and tested. Regression analysis was conducted to examine the relationship between the elements of fraud and financial statement fraud to test the hypotheses. The results indicated that financial targets, earnings management, and related-party transaction are accepted. However, external pressure was rejected. Interestingly, it was found that the fraud companies had poorer earnings quality one year before they committed the financial statement fraud. Overall, this study would assist the auditors as it identifies early warning signals or red flags. Information obtained from this study could be used by Bursa Malaysia to develop strong regulations and encourage the Malaysian public listed companies to enhance anti-fraud policies.

Fraud pentagon elements in detecting fraudulent financial statement

Public companies that are supposed to provide transparent and accountable information to outside parties, sometimes still hide facts and information that have a bad influence on their company's reputation. Public companies in Indonesia in carrying out their business activities have been specifically regulated and supervised by an independent institution, called the Financial Services Authority (OJK). OJK itself has issued several regulations on the presentation of financial statements, such as regulation no. IX.E.2 and rule number VIII.G. This study aims to detect financial statement fraud with the fraud pentagon model. Researchers use elements of financial stability, external pressure, personal financial need, financial target, nature of industry, ineffective monitoring, quality of external auditor, change in auditor, change of directors and frequent number of CEO's picture as independent variables on the ability to detect financial statement fraud as dependent variables. This study uses a sample of fraud companies that are subject to sanctions and cases of the Financial Services Authority (OJK) related to OJK regulations VIII G. 7 and IX. E. 2 in 2015-2019. The company sample consists of 31 fraudulent companies and 31 non-fraud companies.

EFEKTIVITAS KOMITE AUDIT, KUALITAS AUDITOR EKSTERNAL DAN KEMUNGKINAN KECURANGAN PELAPORAN KEUANGAN

The purpose of this study was to obtain empirical evidence on the effect of the effectiveness of the audit committee and the quality of the external auditors on the possibility of financial statement fraud.The population in this study are non-financial companies listed on the Indonesia Stock Exchange. Based on the purposive sampling method, 104 companies were selected as samples. The sample is categorized into two categories, namely fraud companies and non-fraud firms.This study found that the independent audit committee, the number of audit committee meetings, the expertise of the audit committee, the gender diversity of the audit committee, the ethnicity of the audit committee, and the quality of the external auditors did not affect the likelihood of financial statement fraud. In addition, company size and leverage do not affect the possibility of fraudulent financial statements. Meanwhile, company performance actually affects the possibility of financial statement fraud.

Companies convicted of economic crimes and their participation in government tender processes in South Africa: A comment on Namasthethu electrical (PTY) LTD v City of Cape Town and another (201/19) [2020] ZASCA 74 (29 JUNE 2020)

In South Africa, persons or companies convicted of fraud or corruption or companies whose directors have been convicted are debarred from participating in bidding for government tenders. Although it is easy to establish whether or not a natural person has been convicted of an offence, because a certificate can be obtained from the South African Police Service to that effect, it is the opposite with juristic persons. This issue came up in the case of Namasthethu Electrical (Pty) Ltd v City of Cape Town and Another in which the appellant company was awarded a government tender although the company and its former director had been convicted of fraud and corruption. The purpose of this article is to analyse this judgment and show the challenges that the government is faced with when dealing with companies that have been convicted of offences that bid for government tenders. Because South Africa is in the process of enacting public procurement legislation, the Public Procurement Bill was published for comment in early 2020. One of the issues addressed in the Bill relates to debarring bidders who have been convicted of some offences from bidding for government tenders. Based on the facts of this case and legislation from other African countries, the author suggests ways in which the provisions of the Bill could be strengthened to address this issue.

Financial Statement Fraud Risk Factors of Fraud Triangle: Evidence From Indonesia

The purpose of this study is to examine the risk factors that influencing financial statement fraud. Especially, it examines the influence of rationalization, pressure, and opportunity on the fraudulent financial statements and also examines the interaction effect of industry risk and company size on the relationship between rationalization, pressure, and opportunity on financial statement fraud. Secondary data were collected from Bloemberg Data Base, IDX and OJK RI. The population in this study is companies listed on the Indonesia Stock Exchange in the moving year from 2011 to 2017 and the sample was selected by companies that indicated financial statement fraud and those that did not indicate financial statement fraud. The company indicated by Fraud was collected from Bapepam and OJK RI. Data were tested using logistic regression analysis and different T-tests of 28 committed fraud companies and 28 companies that did not commit fraud. The results showed that only some variables had a significant effect on financial statement fraud, namely financial stability (ACHANGE), Financial Target (ROA), and the Nature of Industry (ARCHANGE). The results also show that company size and industry risk do not moderate the fraud factors on financial statement fraud. These results support the fraud triangle theory in explaining the phenomena of financial statement fraud.

Reputational cost of securities fraud in japan under a public-enforcement-centered sanction regime

In American legal discourse, many commentators believe that the best way to deter securities fraud is the class action, despite its serious side effect: frivolous litigation. A comparative study of securities fraud in Japan, which had an identical securities code addressing securities fraud with the U.S. before the adoption of class action, however, presents a different story.This article demonstrates that a regulatory regime such as Japan’s – that does not rely on class actions but instead empowers public enforcement – can make the sanctioned fraud companies suffered substantial reputational cost. As the first comprehensive empirical study of fraudulent disclosure enforcement in Japan, this paper accounts for every securities fraud case that has resulted in sanctions by the Securities Exchange and Surveillance Committee (SESC) until 2018 as a sample. The paper divides a typical Japanese securities fraud scandal into eight stages for analytical purposes and uses event study methodology to measure market reaction to the disclosure of irregularities. The empirical results reveal that securities fraud scandals cause affected companies to lose a substantial portion of their market value under this legal regime. In particular, companies lose around 12% of their market value immediately after they issue a typically vague statement about a potential financial irregularity problem. Also, the magnitude of the market reaction to this statement appears to be an accurate predictor of the seriousness of the scandal, which negatively associates with the holdings of shares owned by the CEO.

Research on Financial Fraud Forecasting Recognition Based on Machine Learning

This paper collects and pre-processes the financial statements of listed companies from the official website of the China Securities Regulatory Commission, Shanghai Stock Exchange and Shenzhen Stock Exchange, and then uses Logistic Regression, SVM, Decision Tree, Random Forest, Adaboost and XGBoost to built predictive models of 150 fraud companies and 523 non fraud companies of similar asset sizes.

Factors Influencing in the Fraudulent Financial Reporting

Fraudulent practice in financial report has resulted in the decrease of reliablity in financial report, causing losses for investors and creditors. The population used in this study are all listed on the Indonesia Stock Exchange (BEI) throughout 2010-2016. The sampling method used is purposive sampling. The number of samples used is 52 companies, consisting of 26 fraud companies obtained from the database of sanctioned misstatement of financial reporting issued by OJK during 2010-2016 period and 26 non-fruad companies with the same size determined under OJK regulation No. POJK.04 about Statement of Registration in the Public Offering and Capital Addition by Granting Right of Priority Effect by Companies with Small Scale Assets or Companies with Medium Scale Assets. This study used logistic regression analysis to examine the research hypothesis. The results of this study indicate that financial leverage and asset composition ratio have positive effect on the possibility of fraudulent financial reporting. Meanwhile, the profitability, liquidity, capital turnover, and receivable turnover ratio have negative effect on the possibility of fraudulent financial reporting .

Improving Experienced Auditors’ Detection of Deception in CEO Narratives

ABSTRACTWe experimentally study the deception detection capabilities of experienced auditors, using CEO narratives from earnings conference calls as case materials. We randomly assign narratives of fraud and nonfraud companies to auditors as well as the presence versus absence of an instruction explaining that cognitive dissonance in speech is helpful for detecting deception. We predict this instruction will weaken auditors’ learned tendency to overlook fraud cues. We find that auditors’ deception judgments are less accurate for fraud companies than for nonfraud companies, unless they receive this instruction. We also find that instructed auditors more extensively describe red flags for fraud companies and more accurately identify specific sentences in narratives that pertain to underlying frauds. These findings indicate that instructing experienced auditors to be alert for cognitive dissonance in CEO narratives can activate deception detection capabilities.

Predicting fraudulent financial reporting using artificial neural network

PurposeThis 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/approachBased 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.FindingsThe findings indicate that the proposed ANN methodology outperforms other statistical techniques widely used for predicting fraudulent financial reporting.Originality/valueThe study is one of few to adopt the ANN approach for the prediction of financial reporting fraud.

Improving Experienced Auditorss Detection of Deception in CEO Narratives

We experimentally study the deception detection capabilities of experienced auditors, using CEO narratives from earnings conference calls as case materials. We randomly assign narratives of fraud and non-fraud companies to auditors as well as the presence versus absence of an instruction explaining that cognitive dissonance in speech is helpful for detecting deception. We predict this instruction will weaken auditors’ learned tendency to overlook fraud cues. We find that auditors’ deception judgments are less accurate for fraud companies than for non-fraud companies, unless they receive this instruction. We also find that instructed auditors more extensively describe red flags for fraud companies and more accurately identify specific sentences in narratives that pertain to underlying frauds. These findings indicate that instructing experienced auditors to be alert for cognitive dissonance in CEO narratives can activate deception detection capabilities.

CORRELATION OF FINANCIAL STATEMENT COMPONENTS IN DETECTING FINANCIAL FRAUD

The purpose of this study is to determine the absence of correlation offinancial statement components as red flags in detecting financial statement fraud. The sampling in this study is done using purposive sampling technique. There are two categories of companies used as the study sample:fraud companies and non-fraud companies. Fraud companies are the companies that get sanction from Capital Market Supervisory Agency (Bapepam) andFinancial Services Authority (OJK) period 2000-2014, while non-fraud companies are selected with the criteria: having equivalent assets, engaging in the same industry, and using the same financial statements as the financial statements used by the fraud companies. The total samples of this study are 122 companies consisting of 61 fraud companies and 61 non-fraud companies. Spearman correlation test is used to answer the research hypothesis.The conclusions of this study are (1) the absence of correlation between cash flows andearnings can be usedas red flags to detect fraud, (2) the existence of correlation between receivables and revenues cannot be used as red flags to detect fraud, (3) the existence of correlation between allowances for uncollectible accounts and receivable cannot be used as red flags to detect fraud.

Strategic risk management for enhanced corporate governance

The purpose of this research is to develop and apply risk management procedures to enhance corporate governance, using examples of Chinese company investments. Strategy and risk should be considered together by management and boards of directors as they need to know what risks are embedded in potential or approved strategies. Strategy and risk are linked and may be viewed as two sides of the same coin. One of the fastest ways to massive value destruction is to undertake a strategy without a thorough consideration of the related risks. Well-known financial fraud prediction models and ratios are applied to an ongoing, possible fraudulent Chinese company. They generated numerous red flags for possible fraudulent financial reporting, using one and two standard deviation measurements for risk assessment. This paper finds potential international equity and debt investment destruction of $12.9 billion for this one company and $34.5 billion when this company’s investment losses are combined with three other ongoing possible Chinese fraud companies. In summary, a risk management approach for enhanced corporate governance is developed and applied to the strategy of international investing. A case study is used to demonstrate both a macro-economic risk assessment of an investment target country and a micro-economic risk assessment of an investment target company, using fraud models and ratios

Temporality and Evidence of Earnings Management in Fraud Companies

Companies manage earnings for a variety of reasons. One method managers use to manipulate earnings in order to meet expectations is discretionary accruals. Fraud and discretionary accruals has been studied in the past but confined in very specific contexts. The purpose of this study is to broaden the generalizability of these studies by addressing two significant issues. First, literature provides ample evidence that companies who managed earnings illegally resulting in fraud, did so using discretionary accruals. However, do all companies that commit fraud resulting in financial restatements, also display behavior consistent with earnings management? The second issue addressed is that of temporality. Is there a pattern to the use of discretionary accruals in the years leading to fraud? In other words is earnings management present for just the fraud period or for further periods leading up to the fraud? Using a sample of AAERs issued by the SEC is used as a proxy for fraud, the results show that earnings management is commonly used in firms who commit accounting fraud broadly not just those using earnings management as the primary vehicle. The results further show that the earnings management extends to more than one year prior to the fraud.

English

On his invited lecture at Beijing University, China, December 2004, Edmund S. Phelps, the winner of the 2006 Nobel Prize in Economics, proposed four indicators of “investment driving forces”, which could be used in measuring the economic growth of a country’s performance, and which might in turn also be eventually reflected in the country’s employment situation. In addition to Edmund Phelps’ four indicators, such as (1) the rate of changes of investment, (2) the rate of changes of foreign exchange (that is, Forex) rate, (3) the rate of changes of employees’ wage incomes as a proportion of GDP, and (4) the rate of changes of the market values of listed stocks as a proportion of GDP, authors suggested two more indicators (5) the severity of market values of fraud companies, and (6) the overdue rate of overall financial institutions. Through the application of regression analysis methodology, this paper will make an empirical estimation, based on Taiwanese historical investment data, on the relationship among “investment driving forces” and country’s economic performance in terms of unemployment rate. Key words: Edmund Phelps, investment driving forces, fraud companies, unemployment rate.

The Journey of SOX, PCAOB, AS2, and AS5 in the Management’s Assessment of Internal Control Over Financial Reporting

The rise of fraud companies led the investors to hide from the market, and thus, the flow of investment in the trading market reduced dramatically. The Accounting Committee needed to stop the misconduct of the companies in providing false financial statements. Therefore, Sarbanes-Oxley Act (SOX) Section 404 was established to mandate the publicly traded companies to provide an auditor’s report on their internal control over financial reporting. This paper focuses on the functions of SOX, Public Company Accounting Oversight Board (PCAOB), Auditing Standard 2, and Auditing Standard 5.