Academic literature on the topic 'Accounting fraud and misstatements'

This thesis consists of three empirical papers that investigate the impacts of equity incentives on accounting fraud from the perspective of the risk it presents for CEOs and controlling shareholders. As a prerequisite for this thesis, the first paper investigates whether AAERs constitute a reliable accounting fraud database, despite their partial coverage of misreporting cases and the resource constraints of the SEC. Using comprehensive samples covering three financial misreporting databases from the U.S., I find that, compared to securities class action lawsuits and restatements, AAERs are composed of firms that are more likely to represent material accounting irregularities, which are characterised by aggressive adoption of accruals, strong financing needs, and significant market impact of misreporting cases. The second paper investigates whether CEOs change their misreporting behaviours at higher levels of equity incentives, at which they may begin to seriously consider the risk side of incentives. Using both unmatched and matched accounting fraud samples from the U.S., I find that, contrary to misreporting patterns at average equity incentives, CEOs’ option delta is negatively associated with accounting fraud propensity, whereas their stock ownership is positively related to this at respectively higher levels. The third paper examines the extent to which, in the context of accounting fraud, controlling shareholders’ control-ownership wedge interacts with their ownership concentration - a common feature of business groups - and with the additional imposition of government regulation on Korean chaebols. Using matched samples from Korea, I find that control-ownership wedge is positively associated with accounting fraud propensity, whereas business group and chaebol affiliations are not. Overall, the results suggest that the impacts of equity incentives on accounting fraud propensity hinge critically on how CEOs and controlling shareholders perceive the risk of accounting fraud commitment.

Healthcare fraud is threatening the economic stability of the U.S. healthcare system and negatively affecting organizational costs. Financial losses from healthcare fraud account for approximately $80 billion per year of the $2.4 trillion healthcare budget. Leadership strategies that may aid in combating Medicare fraud were explored in this qualitative single case study. The criminal violation of trust theory guided the study as it provides healthcare leaders with an understanding of the portion of the fraud triangle over which they have the most control to combat fraud: the opportunity to commit fraud. Data were gathered from review of publically available documents and information received from 10 semistructured interviews with health care leaders in the Mid-Atlantic area of the United States who have the responsibility of overseeing, developing, monitoring, or implementing control mechanisms for Medicare services. Yin's 5-step data analysis process and thematic analysis were used to analyze the data. Three key themes emerged from the study: an effective control environment, an adequate accounting system, and adequate control procedures. Health care leaders in the study recognized that the control environment plays a crucial role on the integrity and ethical values of its employees. The health care leaders acknowledged that an effective accounting system ensures Medicare funds are properly tracked and accounted for. Health care leaders also shared that adequate control procedures aid in deterring fraud and provide reasonable assurance that leaders meet the fiscal and programmatic objectives of the Medicare program. Social implications include reducing healthcare costs for U.S. citizens and creating control strategies that may contribute to a healthcare system to lead to a healthier citizenry.

In the thesis “Analysis of Capabilities Attributed to the Fraud Diamond” research was conducted on fraud and what it takes for a person to commit fraud. The focus of this study was on one aspect of the person committing fraud, the capabilities aspect. This aspect is rather new in the accounting world, being first introduced in 2004. There was an analysis conducted on the six attributes of capabilities. The six attributes went through statistical testing. This testing was to determine whether there are significant differences between the attributes. Based on the results of the testing, recommendations were given. These recommendations were directed towards companies and managers of the companies based on the attributes.

This thesis explores if fraud or mismanagement in municipal governments can be diagnosed or detected in advance of their bankruptcies by financial statement analysis using Benford’s Law. Benford’s Law essentially states that the distribution of first digits from real world observations would not be uniform, but instead follow a trend where numbers with lower first digits (1, 2…) occur more frequently than those with higher first digits (…8,9). If a data set does not follow Benford’s distribution, it is likely that the data has been manipulated. This widespread phenomenon has been used as a tool to detect anomalies in data sets. The annual financial statements of Jefferson County, Vallejo City, and Orange County were analyzed. All the data sets showed overall nonconformity to Benford’s Law and therefore indicated that there was the possibility of fraud occurring. I find that Benford’s Law, had it been applied in real time to those financial statements, would have been able to detect that something was amiss. That would have been very useful because each of those jurisdictions subsequently went bankrupt. This paper demonstrates that Benford’s Law may in some cases be useful as an early indicator to detect the possibility of fraud in municipal governments’ financial data.

Thesis: M. Fin., Massachusetts Institute of Technology, Sloan School of Management, Master of Finance Program, 2014.<br>Cataloged from PDF version of thesis.<br>Includes bibliographical references (pages 56-59).<br>Using two popular accounting-based models for earnings manipulation (i.e., the Beneish M-Score and the Dechow F-Score) and the financial data of public companies from 2004 to 2012, 1 find that the M-Score (F-Score) predicts less (more) earnings overstatements during the recent financial crisis in 2007-2008 than other sample years. However, a detailed investigation at the industry level reveals that this does not hold in all industries. I further show that the potential misstating firms flagged by the M-Score tend to under-perform the market both at the aggregate and the industry level, and some of those flagged by the F-Score under-perform at the industry level. Finally, by running Fama-French three-factor regressions at the aggregate level, I provide evidence that the firms flagged by the MScore generally yield negative risk-adjusted stock returns. The evidence suggests public availability of financial statements alone does not ensure that all the elements of financial statements are fully integrated into prices in a timely manner. Overall, this study provides substantial support for the use of quantitative accounting analysis in equity trading.<br>by Suzie Noh.<br>M. Fin.

Earnings management and accounting fraud are detrimental to the integrity of financial reporting, and more worryingly, are pervasive. Furthermore, there is often a grey area in which individuals regularly question whether or not specified accounting methods are strictly legal and permitted, or an underhanded abuse of GAAP-granted flexibility. In response, recently there has been an uprising of legislation attempting to curb the incidence of both these events, but there is still question as to whether or not these attempts are effective, or even wholly necessary. This piece examines methods of accounting manipulation through an analysis of cases, and then analyzes the effects on companies of attempts at both regulation and prevention.

The ASB recently proposed that auditors explicitly assess fraud risk and document their planned response to the level of fraud risk. Researchers and practitioners have recommended that auditors perform separate risk assessments for intentional misstatements (e.g., management fraud) and unintentional misstatements (e.g., errors) in order to improve auditors' ability to detect fraud. This study examines the effects of this requirement on auditors' planning decisions. In comparison with auditors who make combined inherent risk assessments, auditors who make a separate inherent risk assessment are expected to spend more time attending to fraud cues and react to changes in fraud risk indicators more readily. Additionally, auditors who make separate risk assessments are expected to report less confidence in their fraud risk assessment when compared to their error risk assessment due to the difficulty of interpreting the implications of strategic behavior. A computerized test instrument monitored auditors' time attending to fraud cues. Four versions of the software manipulated, between subjects, the type of inherent risk assessment required (i.e., separate assessments for intentional and unintentional misstatements or a combined assessment) and the indicators of fraud risk in an audit case (i.e. 'low' or 'high' fraud risk). Auditors' planning decisions are used to measure their response to the indicators of fraud risk. Evidence of the effects of performing a separate fraud risk assessment may provide policy makers with information to evaluate the economics of the ASB's proposed policy change. Data analyses indicate that auditors who separately assessed fraud risk used significantly more time attending to the fraud cues. Additionally, the group who separately assessed fraud risk budgeted significantly more hours for the case that indicated higher fraud risk than the lower fraud risk case while the other group reported no significant difference in planned hours. Analyses of audit procedure selections revealed no significant differences between groups suggesting that auditors do not modify the nature of their audit tests as a response to perceived fraud risk. Finally, comparisons of auditors' confidence in their risk assessments showed that they were significantly less confident in their fraud risk assessment than in their error risk assessment.