Articlegreen2002

Detecting falsified financial statements: a comparative study using multicriteria analysis and multivariate statistical techniques

Charalambos T. Spathis · Michael Doumpos · C. Zopounidis

225 citations0/0 files storedEuropean Accounting Review

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Auditing, Earnings Management, Governance Financial Distress and Bankruptcy Prediction Benford’s Law and Fraud Detection

Abstract

Falsifying financial statements involves the manipulation of financial accounts by overstating assets, sales and profit, or understating liabilities, expenses or losses. This paper explores the effectiveness of an innovative classification methodology in detecting firms that issue falsified financial statements (FFS) and the identification of the factors associated to FFS. The methodology is based on the concepts of multicriteria decision aid (MCDA) and the application of the UTADIS classification method (UTilités Additives DIScriminantes). A sample of 76 Greek firms (38 with FFS and 38 non-FFS) described over ten financial ratios is used for detecting factors associated with FFS. A jackknife procedure approach is employed for model validation and comparison with multivariate statistical techniques, namely discriminant and logit analysis. The results indicate that the proposed MCDA methodology outperforms traditional statistical techniques which are widely used for FFS detection purposes. Furthermore, the results indicate that the investigation of financial information can be helpful towards the identification of FFS and highlight the importance of financial ratios such as the total debt to total assets ratio, the inventories to sales ratio, the net profit to sales ratio and the sales to total assets ratio.

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References

1997An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud 1991The Financial and Market Effects of the SEC's Accounting and Auditing Enforcement Releases 1999Incentives and Penalties Related to Earnings Overstatements that Violate GAAP 1998Fraudulently Misstated Financial Statements and Insider Trading: An Empirical Analysis.2000A Decision Aid for Assessing the Likelihood of Fraudulent Financial Reporting 1997Auditing an Integrated Approach 1999Fraudulent Financial Reporting: 1987-1997 An Analysis of U.S. Public Companies 1998Fraud type and auditor litigation: An analysis of SEC accounting and auditing enforcement releases.

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2011The Transition to IFRS and the Value Relevance of Financial Statements in Greece 2011Accounting disclosures, accounting quality and conditional and unconditional conservatism 2011Bankruptcy prediction in firms with statistical and intelligent techniques and a comparison of evolutionary computation approaches 2010A support vector machine-based model for detecting top management fraud

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