IDEAS home Printed from https://ideas.repec.org/a/bla/acctfi/v61y2021i3p4601-4638.html
   My bibliography  Save this article

Lifting the numbers game: identifying key input variables and a best‐performing model to detect financial statement fraud

Author

Listed:
  • Adrian Gepp
  • Kuldeep Kumar
  • Sukanto Bhattacharya

Abstract

This study enables practitioners and researchers to make an informed choice for a financial statement fraud detection model, rather than defaulting to popular, yet dated, models. Using a specifically devised performance criterion, our newly configured ensemble outperforms 31 others in the most comprehensive comparison to date spanning parametric, non‐parametric, big data and ensemble techniques. We use a large set of input variables and holdout data relative to prior studies. We find empirical support for financial and non‐financial variables covering the three Fraud Triangle factors. New findings include fraud risk being reduced with more debt, likely from increased monitoring by creditors.

Suggested Citation

  • Adrian Gepp & Kuldeep Kumar & Sukanto Bhattacharya, 2021. "Lifting the numbers game: identifying key input variables and a best‐performing model to detect financial statement fraud," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4601-4638, September.
    • Handle: RePEc:bla:acctfi:v:61:y:2021:i:3:p:4601-4638
    DOI: 10.1111/acfi.12742
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/acfi.12742
    Download Restriction: no
    File URL: https://libkey.io/10.1111/acfi.12742?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Shane A. Johnson & Harley E. Ryan & Yisong S. Tian, 2009. "Managerial Incentives and Corporate Fraud: The Sources of Incentives Matter," Review of Finance, European Finance Association, vol. 13(1), pages 115-145.
    2. Bethany Hoogs & Thomas Kiehl & Christina Lacomb & Deniz Senturk, 2007. "A genetic algorithm approach to detecting temporal patterns indicative of financial statement fraud," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 15(1‐2), pages 41-56, January.
    3. Alessandra Capezio & Astghik Mavisakalyan, 2016. "Women in the boardroom and fraud: Evidence from Australia," Australian Journal of Management, Australian School of Business, vol. 41(4), pages 719-734, November.
    4. Joseph F. Brazel & Keith L. Jones & Mark F. Zimbelman, 2009. "Using Nonfinancial Measures to Assess Fraud Risk," Journal of Accounting Research, Wiley Blackwell, vol. 47(5), pages 1135-1166, December.
    5. Lynnette Purda & David Skillicorn, 2015. "Accounting Variables, Deception, and a Bag of Words: Assessing the Tools of Fraud Detection," Contemporary Accounting Research, John Wiley & Sons, vol. 32(3), pages 1193-1223, September.
    6. Li, Jialong & Haider, Zulfiquer Ali & Jin, Xianzhe & Yuan, Wenlong, 2019. "Corporate controversy, social responsibility and market performance: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 60(C), pages 1-18.
    7. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    8. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 107-156.
    9. Richardson, Scott A. & Sloan, Richard G. & Soliman, Mark T. & Tuna, Irem, 2005. "Accrual reliability, earnings persistence and stock prices," Journal of Accounting and Economics, Elsevier, vol. 39(3), pages 437-485, September.
    10. Simi Kedia & Thomas Philippon, 2009. "The Economics of Fraudulent Accounting," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2169-2199, June.
    11. Beneish, Messod D., 1997. "Detecting GAAP violation: implications for assessing earnings management among firms with extreme financial performance," Journal of Accounting and Public Policy, Elsevier, vol. 16(3), pages 271-309.
    12. Kurt M. Fanning & Kenneth O. Cogger, 1998. "Neural network detection of management fraud using published financial data," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 7(1), pages 21-41, March.
    13. Patricia M. Dechow & Weili Ge & Chad R. Larson & Richard G. Sloan, 2011. "Predicting Material Accounting Misstatements," Contemporary Accounting Research, John Wiley & Sons, vol. 28(1), pages 17-82, March.
    14. Thomas A. Lee & Robert W. Ingram & Thomas P. Howard, 1999. "The Difference between Earnings and Operating Cash Flow as an Indicator of Financial Reporting Fraud," Contemporary Accounting Research, John Wiley & Sons, vol. 16(4), pages 749-786, December.
    15. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    16. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    17. Dongmin Kong & Junyi Xiang & Jian Zhang & Yiyang Lu, 2019. "Politically connected independent directors and corporate fraud in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(5), pages 1347-1383, March.
    18. Patricia M. Dechow & Richard G. Sloan & Amy P. Sweeney, 1996. "Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 1-36, March.
    19. David T. Tan & Larelle Chapple & Kathleen D. Walsh, 2017. "Corporate fraud culture: Re-examining the corporate governance and performance relation," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(2), pages 597-620, June.
    20. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    21. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    22. Merle Erickson & Michelle Hanlon & Edward L. Maydew, 2006. "Is There a Link between Executive Equity Incentives and Accounting Fraud?," Journal of Accounting Research, Wiley Blackwell, vol. 44(1), pages 113-143, March.
    23. Belinna Bai & Jerome Yen & Xiaoguang Yang, 2008. "False Financial Statements: Characteristics Of China'S Listed Companies And Cart Detecting Approach," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 339-359.
    24. Lin Liao & Guanting Chen & Dengjin Zheng, 2019. "Corporate social responsibility and financial fraud: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(5), pages 3133-3169, December.
    25. Adrian Gepp & Kuldeep Kumar & Sukanto Bhattacharya, 2010. "Business failure prediction using decision trees," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(6), pages 536-555.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xiaowei Chen & Cong Zhai, 2023. "Bagging or boosting? Empirical evidence from financial statement fraud detection," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(5), pages 5093-5142, December.
    2. Duncan, Keith & Gepp, Adrian & Craig, Justin & O'Neill, Helen, 2023. "Research ideas matter: Guidance for research students and early career researchers," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    3. Esraa Faisal Malik & Khai Wah Khaw & Bahari Belaton & Wai Peng Wong & XinYing Chew, 2022. "Credit Card Fraud Detection Using a New Hybrid Machine Learning Architecture," Mathematics, MDPI, vol. 10(9), pages 1-16, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dan Amiram & Zahn Bozanic & James D. Cox & Quentin Dupont & Jonathan M. Karpoff & Richard Sloan, 2018. "Financial reporting fraud and other forms of misconduct: a multidisciplinary review of the literature," Review of Accounting Studies, Springer, vol. 23(2), pages 732-783, June.
    2. Mingzi Song & Naoto Oshiro & Akinobu Shuto, 2016. "Predicting Accounting Fraud: Evidence from Japan," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 6, pages 17-63, December.
    3. Rind, Asad Ali & Abbassi, Wajih & Allaya, Manel & Hammouda, Amira, 2022. "Local peers and firm misconduct: The role of sustainability and competition," Economic Modelling, Elsevier, vol. 116(C).
    4. Song Mingzi & Naoto Oshiro & Akinobu Shuto, 2016. "Predicting accounting fraud: Evidence from Japan (Accepted by The Japanese Accounting Review)," CARF F-Series CARF-F-402, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    5. Clive Lennox & Petro Lisowsky & Jeffrey Pittman, 2013. "Tax Aggressiveness and Accounting Fraud," Journal of Accounting Research, Wiley Blackwell, vol. 51(4), pages 739-778, September.
    6. Zvi Singer & Jing Zhang, 2022. "Do companies try to conceal financial misstatements through auditor shopping?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(1-2), pages 140-180, January.
    7. Joanna Wyrobek & Lukasz Poplawski & Marcin Surowka, 2020. "Identification of a Fraudulent Organizational Culture in Enterprises Listed in Warsaw Stock Exchange," European Research Studies Journal, European Research Studies Journal, vol. 0(Special 2), pages 622-637.
    8. Hoberg, Gerard & Lewis, Craig, 2017. "Do fraudulent firms produce abnormal disclosure?," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 58-85.
    9. Irena Hutton & Danling Jiang & Alok Kumar, 2015. "Political Values, Culture, and Corporate Litigation," Management Science, INFORMS, vol. 61(12), pages 2905-2925, December.
    10. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    11. Abdullah Albizri & Deniz Appelbaum & Nicholas Rizzotto, 2019. "Evaluation of financial statements fraud detection research: a multi-disciplinary analysis," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 16(4), pages 206-241, December.
    12. Abdul Ghafoor & Rozaimah Zainudin & Nurul Shahnaz Mahdzan, 2019. "Factors Eliciting Corporate Fraud in Emerging Markets: Case of Firms Subject to Enforcement Actions in Malaysia," Journal of Business Ethics, Springer, vol. 160(2), pages 587-608, December.
    13. Lars Helge Hass & Monika Tarsalewska & Feng Zhan, 2016. "Equity Incentives and Corporate Fraud in China," Journal of Business Ethics, Springer, vol. 138(4), pages 723-742, November.
    14. So-Jin Yu & Jin-Sung Rha, 2021. "Research Trends in Accounting Fraud Using Network Analysis," Sustainability, MDPI, vol. 13(10), pages 1-26, May.
    15. Wei Zhu, 2016. "Accruals and price crashes," Review of Accounting Studies, Springer, vol. 21(2), pages 349-399, June.
    16. Call, Andrew C. & Kedia, Simi & Rajgopal, Shivaram, 2016. "Rank and file employees and the discovery of misreporting: The role of stock options," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 277-300.
    17. Monica Ramos Montesdeoca & Agustín J. Sánchez Medina & Felix Blázquez Santana, 2019. "Research Topics in Accounting Fraud in the 21st Century: A State of the Art," Sustainability, MDPI, vol. 11(6), pages 1-31, March.
    18. Patrick Velte, 2023. "The link between corporate governance and corporate financial misconduct. A review of archival studies and implications for future research," Management Review Quarterly, Springer, vol. 73(1), pages 353-411, February.
    19. Chia-Ling Chao & Shwu-Min Horng, 2013. "Asset write-offs discretion and accruals management in Taiwan: the role of corporate governance," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 41-74, January.
    20. Joseph McManus, 2018. "Hubris and Unethical Decision Making: The Tragedy of the Uncommon," Journal of Business Ethics, Springer, vol. 149(1), pages 169-185, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:acctfi:v:61:y:2021:i:3:p:4601-4638. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/aaanzea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.