Fraudulent Companies Research Articles

Economic Crimes and Companies of East India

At present, economic crimes are capturing the headlines in India. In eastern India ‘chit fund’ companies have drawn the attention of all by accumulating billions of pounds from millions of people. A huge amount of public money has been siphoned off from the mainstream economy for wrongful gain through chit fund channels often with the complicity of politicians. Some masterminds have been deceiving people through these white-collar crimes taking advantage of inert administrative systems. Surprisingly, common people are falling into the traps persistently set by these fraudulent companies despite of getting awful examples from the past. Economic crime is a new concept with respect to other conventional crimes in India but the nature of economic offenses is pervasive. This humble effort of mine shall aware common people and equip the regulatory authorities against these criminals.

Combining Benford’s Law and machine learning to detect money laundering. An actual Spanish court case

ObjectivesThis paper is based on the analysis of the database of operations from a macro-case on money laundering orchestrated between a core company and a group of its suppliers, 26 of which had already been identified by the police as fraudulent companies. In the face of a well-founded suspicion that more companies have perpetrated criminal acts and in order to make better use of what are very limited police resources, we aim to construct a tool to detect money laundering criminals. MethodsWe combine Benford’s Law and machine learning algorithms (logistic regression, decision trees, neural networks, and random forests) to find patterns of money laundering criminals in the context of a real Spanish court case. ResultsAfter mapping each supplier’s set of accounting data into a 21-dimensional space using Benford’s Law and applying machine learning algorithms, additional companies that could merit further scrutiny are flagged up. ConclusionsA new tool to detect money laundering criminals is proposed in this paper. The tool is tested in the context of a real case.

Accounting Flexibility: Slippery Slope to Fraud?

The paper explores the idea that earnings fraud follows a slippery slope wherein companies manage earnings “legitimately” to achieve pre-determined targets, then aggressively in an effort to achieve the desired results; if the desired results are still not achieved, then, the only option open is to “cook the books” by falsifying documents. Four illustrative cases of fraudulent companies were analysed qualitatively to assess how the slope of earnings management was slippery; and over time earnings management became fraud. The outcomes are that whenever there is a need to meet internal or external earnings expectations, conceal the company’s deteriorating financial condition, increase the stock price or increase management compensation based on financial results; flexibility in accounting standards have provided an opportunity to manage earnings legitimately, aggressively and then fraudulently. While flexibility in accounting is sacrosanct; it is recommended that managers be mindful that the slope of earnings management could be slippery enough to lead to fraud; they should therefore be mindful of those repetitive “small indiscretions”. If possible, managers should address those small deceptive acts; they should clearly delineate what is allowed and what is absolutely forbidden. Furthermore, managers should ensure that governance mechanisms and codes of conduct and ethics of corporations are adhered to and rigorously enforced.

Corporate governance fraud detection from annual reports using big data analytics

Financial reports of corporations publicise their performance. This in turn motivates manipulation of financial statements. Falsification of financial statements over prolonged period results in sudden collapse of multi-national companies, long-term economic loss to government and loss of trust of public. Detecting management frauds using normal audit procedures is time expensive as huge volume of data needs to be analysed. Hence additional analytical procedures should be used. The proposed work aims at automated analysis of annual reports using MapReduce paradigm to identify fraudulent companies. Annual reports of companies from public repositories are parsed to extract features for preparing a score card. Principal component analysis is applied on the score card to extract the principal features to train support vector machine. Experimental results show that 90% accuracy can be achieved using 10% to 25% of the principal features. Using MapReduce paradigm for feature extraction and classification improves the time efficiency by 85%.

Board of Director's Attributes as Deterrence to Corporate Fraud

Abstract Good corporate governance serves a great shield for the company to counter corporate fraud. Several attributes create good corporate governance and one of them is the board of directors. This paper examines the influence of board size, board meeting and board duality in deterring corporate fraud on 99 fraudulent companies listed under the Malaysian Securities Commission enforcement action for criminal prosecution or civil action regarding corporate fraud. These companies are then matched with another 99 non-fraudulent public listed companies in Bursa Malaysia. This study covered a period of ten (10) years, from the year 2000 until 2010. The panel data of ten (10) years was used to provide a stronger suggestion of causality via natural examination and subsequently, would provide better evidence from the analysis of board of director's attributes. Binary logistic regression analysis is used to analyse the data obtained. The result shows that there is a significant influence between the frequency of board meetings and corporate fraud. However, there is no significant influence between board size and board duality toward corporate fraud. This study concluded that in Malaysia the frequency of board meetings can be used as a method to deter corporate fraud. The findings will contribute to enhance the existing corporate governance policy in Malaysia to foster the achievement of zero corporate fraud.

Value added tax evasion and excise duty fraud on fuel market in the Czech Republic

This paper deals with analysis of current problems in the motor fuel market. It analyzes bottlenecks in setting the legislative changes in value added tax, excise tax and the legislation concerning fuels. The biggest problem is tax evasions that favor one group of business entities at the expense of another, and also cause that the state loses revenues mainly from indirect taxes. Therefore, attention is directed to quality control of fuels as a means of consumer protection and prevention of tax evasion and ways to combat tax evasion in import, distribution and storage of mineral oils. The examples are the most common errors found in fraudulent companies. Based on the data collected the possible ultimate evasion was estimated. Therefore, I propose that value added tax law should be amended and some other measures to improve supervision by public authorities like tax authorities and customs administration offices should be taken.

Online recruitment information as an indicator to appraise enterprise performance

PurposeFraudulent financial statements and the manipulation of stock prices can seriously affect investors' judgment of company performance, especially in stock markets in emerging economies. Apart from financial reports, which run the risk of being misreported, are there any other information sources that the public can trust when it comes to the truth about a company's performance? The purpose of this paper is to address this issue by assessing the correlation between online recruitment information and company performance and provide investors with a new framework to assist them in making decisions and to identify fraud.Design/methodology/approachThe research extracted the recruitment information of normal and fraudulent companies separately from the internet by employing techniques of natural language processing, opinion mining and competitive intelligence. A statistical tool was then used to study whether there is a difference in the correlation between the recruitment information intensity (RII) and the annually averaged stock price (AASP) of normal and fraudulent firms.FindingsThe experiments showed that recruitment information intensity is significantly correlated to company's stock performance for normal firms, which indicates that the company's recruitment activities are consistent with their performance. But for fraudulent companies, the fact that the result is quite the opposite may imply that the RII discloses the truth when managers make misreports.Practical implicationsThe findings suggest that the intensity of a company's recruitment information is a valuable element for investors in evaluating the firm, and it also can be used as a reliable tool to assist in identifying fraudulent companies.Originality/valueThis paper provided a novel way for the public to break information barriers to reach the truth of companies' performance and avoid misleading fraudulent finance statements. It is also a useful application of natural language processing techniques.

Restatement Announcements: Sincerity Analysis Through Information Manipulation Theory

This study explore whether publicly held companies manipulate the restatement announcement arising from material errors and/or fraud. It analyzes the information provided in the press and in the 8-Ks (8K-PR) by applying Information Manipulation Theory. Results indicate that companies manipulating the quality and the timing of information released in the 8K-PR related to restatement are more likely to mislead investors. Precisely, we find that companies disclosing inaccurate information in the 8K-PR and delaying releasing the restated earnings are more likely to occur among fraudulent companies.

Management Insights

Management Insights

Fraudulent Financial Reporting and Companies' Characteristics: Evidence from Tax Audit

Fraudulent financial reporting has become an important issue in accounting profession. The implementation of self assessment system appears as incentives to companies to misstate their financial reports to reduce tax obligation. Fraudulent financial reporting may cause vast losses to government income, as well as losses to the users of financial reports. This study examines the relationship between fraudulent financial reporting and firms' characteristics that are size, types of ownership and types of auditor in companies audited by Inland Revenue Board of Malaysia (IRB). This study uses political cost theory to explain fraudulent financial reporting in companies. The study found that company size and audit quality have significant negative relationships with fraudulent financial reporting. Findings from this study may assist IRB in identifying possible cases for audit in the future.

Can Investors Detect Fraud Using Financial Statements: An Exploratory Study

This study explores the question of whether investors can successfully detect management fraud using a firm's financial statements. Using financial ratios obtained from fraudulent companies’ financial statements, we examine the effectiveness of both logit and discriminant analyses in predicting the likelihood of fraud. Sixty-eight fraudulent companies used in the study are identified from the SEC's Accounting and Auditing Enforcement Releases. Our research design has addressed certain weaknesses present in prior fraud-detection studies. The empirical results suggest that ratio analysis is grossly ineffective in detecting financial statement fraud. We also discuss the implications of our findings on future research.

Corporate reputation: Anything but superficial – the deep but fragile nature of corporate reputation

Corporate reputation has never been more valuable – or more vulnerable. All of the corporate malfeasance of the past few years in the US not only showed how precious and fleeting reputation is, but it also demonstrated how one company’s misdeeds taint an entire industry. Some businesses with superb reputations have found themselves unfairly lumped with the pack of fraudulent companies, and some executives have been dismayed to learn that they are viewed as greedy and unprincipled. One of the most important rules of reputation management is the need for constant vigilance. Companies today are exposed to unprecedented scrutiny through the Internet and 24‐hour all‐news television channels. Business is truly global and information, especially gossip, travels fast. Many people mistakenly equate reputation with corporate social responsibility and ethical behavior. While certainly of growing importance, ethics and social responsibility are but two elements of the equation. Financial performance, the workplace, quality of products and services, corporate leadership, and vision also figure into reputation. There’s also that elusive emotional bond between a company and its stakeholders that is central to the most enduring reputations. If they ever hope to maximize the value of their reputations, companies must make reputation management a fundamental part of the corporate culture and value system. Companies must spread the message of reputation management throughout the organization and make employees cognizant of how each and every one of them affects reputation on a daily basis. Reputation must be central to the corporate identity, not merely clever image advertising and manipulative public‐relations ploys.

Can financial ratios detect fraudulent financial reporting?

Fraudulent financial reporting is a matter of grave social and economic concern. The Treadway Commission recommended that the Auditing Standards Board require the use of analytical procedures to improve the detection of fraudulent financial reporting. This is an exploratory study to determine if financial ratios of fraudulent companies differ from those of nonfraudulent companies. Fraudulent firms were identified by examining the SEC's Accounting and Auditing Enforcement Releases issued between 1982 and 1999. The fraudulent firms (n=79) were then matched with nonfraudulent firms on the basis of firm size, time period, and industry. Using this matched‐pairs design, ratio analysis for a seven‐year period (i.e. the fraud year −/+ 3 years) was conducted on 21 ratios. Overall, 16 ratios were found to be significant. Of these, only three ratios were significant for three time periods. Of the 16 statistically significant ratios, only five were significant during the period prior to the fraud year. Using discriminant analysis, misclassifications for fraud firms ranged from 58 percent to 98 percent. These results provide empirical evidence of the limited ability of financial ratios to detect and/or predict fraudulent financial reporting.