Forecasting fraudulent financial statements

Accounting frauds can be classified as either fraudulent financial reporting or misappropriation of assets, or both (Albrecht et al., 2001). Fraudulent financial reporting is commonly known as “cooking the books.” The Treadway Commission defined fraudulent financial reporting as the intentional or reckless conduct, whether by act or omission, that results in materially misleading financial statements. In presenting inaccurate financial statements, fraudulent financial reporting will have significant consequences for both the organization and for the public’s confidence in the capital markets. Misappropriation of assets is simply using assets and resources for unintended purposes. Such fraud includes thievery, embezzlement, and cash skimming.

The results obtained from (Kotsiantis et. al, 2006) experiments indicated that published financial statement data contains falsification indicators. A relatively small list of financial ratios largely determines the classification results. This knowledge, coupled with machine learning algorithms, can provide models capable of achieving considerable classification accuracies.

References

Albrecht, C.C., Albrecht, W.S. and Dunn, J.G. (2001), “Can auditors detect fraud: a review of the research evidence”, Journal of Forensic Accounting, Vol. 2 No. 1, pp. 1-12.

S. Kotsiantis, E. Koumanakos, D. Tzelepis, V. Tampakas, Forecasting Fraudulent Financial Statements Using Data Mining, International Journal of Computational Intelligence, 2006, Vol 3(2), pp. 104-110.