Author: Vighnesh Jadhav
MMS, Roll No 18.
THE FINANCIAL FRAUDS
Unraveling Financial Fraud:
Michelle Liu. et al (2023) states that Although firms are encouraged by the SEC and Department of Justice to conduct internal investigations following financial misconduct, prior research finds few benefits for investigating firms. This study examines a novel aspect of internal investigations namely, whether the investigation is conducted by independent versus non independent teams and explores the impact of these teams on investigation outcomes. Consistent with our predictions, we find that firms whose internal investigations are led by independent teams are more likely to retain external advisors, have a higher likelihood of CEO turnover, and face a lower likelihood of an SEC enforcement action than do firms whose investigations are led by non independent teams. Our findings demonstrate that the SEC grants enforcement leniency to firms that conduct an internal investigation, but this finding only holds when the investigation leader is considered independent. These results also suggest that appointing independent groups to lead internal investigations protects the firm, at the expense of the CEO, following accounting fraud. Our paper has important implications for researchers studying accounting irregularities as we are the first to show that independent board members and external advisors play a direct role in the resolution of financial misconduct through their job on the internal investigation team.
Financial fraud and individual investment behaviour:
Johannes Hagen. et al (2023) states that the revelation of financial fraud in a major pension fund manager, two-thirds of affected investors fail to divest. Inert investors are on average younger, of lower SES and more influenced by default options. The majority of those who divest move their money to the only state-run option on the fund menu. The revelation of fraud also induces a small movement of investors from non-fraudulent private investment funds to the state alternative. We further show that most fraud victims end up in underperforming high-fee funds through their prior affiliation with a subscription-based financial advisor. Our analysis is based on the remarkable events surrounding the expulsion of Allra from the Swedish Premium Pension, and administrative, individual-level data on mutual fund choices and background characteristics. Our results illustrate that fraudulent fund managers may exploit widespread consumer biases in choice-oriented pension plans, and that information interventions by the government are important but far from fully effective in nudging victimized investors to take the right action. Pension plans may be characterized by investor inertia even under extreme circumstances such as fraud.
Tracking disclosure change trajectories for financial fraud detection:
Rong Liu. et al (2023) states that The global economic disruption brought by COVID‐19 crisis can set a stage for the prevalence of financial statement frauds, which jeopardize the efficient functioning of capital markets. In this paper, we propose a nuanced method to detect frauds by tracking granular changes in disclosures over time. Specifically, we first align paragraphs between consecutive disclosures by their similarities. This alignment can be solved as an optimization‐based matching problem. Then we identify three types of changed contents: recurrent, newly added, and deleted contents. For each type, we measure the changes in terms of fraud‐relevant linguistics features, such as sentiment and uncertainties. Further, we formulate a firm’s Management Discussion and Analysis change trajectory over years as a multivariate time series composed of these granular metrics. We implement a deep learning model to predict frauds using the change trajectory as an input. Extensive experiments demonstrate that our model significantly outperforms benchmark models, and its performance increases with the length of the change trajectory. Moreover, we found specific types of changes are strongly associated with frauds, including weak modal or reward words in newly added or deleted contents. Our work provides an optimization‐based method to define change trajectories and trace information mutation in narratives. Finally, our study contributes to the fraud detection literature with a new predictive signal disclosure change trajectories with an effective deep learning architecture.
The relationship between politics, legal system and financial reporting on fraud:
Kishore Singh. et al (2023) states that Fraud is a challenging problem. Its economic effects are clear – worse public services, less financially stable and profitable companies, charities deprived of resources needed for charitable purposes and diminished levels of disposable income of everyone. In every sector globally, fraud has an adverse impact on the quality of life. Fraud threatens the effective and efficient utilization of resources and hence is of great concern to industries, the whole community and academia. Research Question: Does political regime moderate the relationship between financial reporting regime and on fraud? Does the legal system moderate the relationship between financial reporting regime and on fraud? What is the impact of financial reporting regime, legal regime and political regime on fraud at national level? Idea: This study investigates how political, legal and financial reporting impacts on fraud at a country level and whether any triangular effects exist. Data: Country level data published by ACFE, World Fact book, Deloitte IAS Plus Report, IFAC Report and Economic Intelligence Unit Report on Democracy Index for 106 countries for the years 2010 to 2014 was used. Tools: To test study’s hypotheses and to determine the interactive effects of legal regime, political regime and financial reporting regime on fraud, a three-way ANOVA is used. To determine the impact of the independent variables on fraud, pooled regression analysis is used. Findings: The findings provide both theoretical and empirical evidence on the interaction effects of political, legal and financial reporting regimes on fraud. Political and legal regime has a significant interaction with financial reporting on fraud as posited by political accountability theory and legal theory. Even the main effects of each regime separately are statistically significant. Contribution: given the complex nature of frauds, the study is relevant to regulators, practising auditors, legal and political experts and politicians engaged in the debate on frauds and how to address this harmful act at a cross country level. When collusion exists between executive, legislative oversight in a full democratic regime is weakened, impacting the mechanism of fraud minimisation.
The effect of intellectual capital on fraud in financial statements:
Mahdi Salehi. et al (2023) states that The purpose of this present study is to assess the impact of intellectual capital on fraud in listed firms’ financial statements on the Tehran Stock Exchange. In other words, this paper seeks to figure out whether IC and its components, namely, the efficiency of human capital, structural capital, relational capital and customer capital. Design/methodology/approach: The logistic regression model is used for analyzing the material of this study. Research hypotheses are also examined using a sample of 187 listed firms on the TSE during 2011–2018 by employing the logistic regression pattern based on synthetic data technique. Moreover, some robustness checks are also used to ensure the correctness of the obtained results. Findings: The findings show a negative and significant relationship between IC and its components, including the efficiency of HC, SC, RC and CC, and fraud in financial statements. This means that by investing in the IC and its components, the amount of fraud in business firms’ financial statements decreases. Originality/value: Since few studies are carried out by existing literature, this paper is among the pioneer efforts assessing IC’s potential impact on fraud commitment. The findings apply to policymakers to improve the clarity of the business atmosphere of Iran.
Anti‐money laundering and financial fraud detection: A systematic literature review:
Taciana Mareth. et al (2023) states that Money laundering has affected the global economy for many years, and there are several methods of solving it presented in the literature. However, when tackling money laundering and financial fraud together there are few methods for solving them. Thus, this study aims to identify methods for anti‐money laundering and financial fraud detection. A systematic literature review was performed for analysis and research of the methods used, utilizing the SCOPUS and Web of Science databases. Of the 48 articles that aligned with the research theme, 20 used quantitative methods for AML and FFD solution, 13 were literature reviews, 7 used qualitative methods, and 8 used mixed methods. This study contributes by presenting a systematic literature review that fills two research gaps: lack of studies on AML and FFD, and the methods used to solve them. This will assist researchers in identifying gaps and related research.
Fraudulent financial reporting: an application of fraud diamond to Toshiba’s accounting scandal:
Polydoros Demetriades. et al (2023) states that The purpose of this paper is to examine Toshiba’s fraudulent financial reporting in relation to the fraud diamond (pressure, opportunity, rationalisation and capability). Design/methodology/approach: A quantitative empirical research, analysing secondary data from Toshiba’s published annual reports before restatement, from 2008–2014 has been used. A simultaneous equations approach was used to test the hypothesis. Excel software was used to analyse secondary data and to carry out correlation analysis and descriptive statistics analysis. Findings: This study uncovers evidence that pressure proxied by return on assets, the opportunity proxied by ineffective monitoring, rationalisation proxied by audit opinion and capability proxied by board member changes had moderate to strong relationship to financial statement fraud. However, ROA has a negative and significant effect on Toshiba’s FSF. BDOUT, AO and BCHANGE have positive and significant effect on Toshiba’s FSF. Furthermore, there is no multicollinearity problem within the four variables. Overall, this study has statistically proven that all dimensions of fraud diamond are required for the explanation of Toshiba’s accounting scandal. Originality/value: Although a few studies discuss the four dimensions, none, to our surprise, exists which explain the circumstances led Toshiba’s high-level executives to commit fraud. This study is the first thorough investigation of Toshiba’s accounting scandal that uses all four dimensions to explain Toshiba’s FSF.
Corporate Financial Fraud and Countermeasures in the Internet Era:
Huang Weidong. et al (2023) states that the advent of the internet age and the outbreak of COVID-19, many companies have embraced online trade. However, due to the way the cyber economy works, the number of companies engaged in financial fraud by falsifying their transaction amounts and customer numbers has been gradually increasing. The purpose of this study is to analyze financial fraud of companies in the Internet era and to present solutions. Therefore, this study analyzed the financial fraud behavior of Luckin Coffee in China as an example and studied the causes and countermeasures of financial fraud. As a result, it was found that the cause of financial fraud lies in the opacity of cash flows from online transactions. The recommendations proposed by this study is to improve internal control systems in companies, develop risk management system, and establish comprehensive external supervision system.
Enhanced financial fraud detection using cost‐sensitive cascade forest with missing value imputation:
Lukui Huang. et al (2023) states that Financial statement fraud is a global problem for investors, audit firms, regulators, and other stakeholders. Fraud detection can be regarded as a binary classification problem with a false negative being more expensive than a false positive. Although existing studies have made great efforts to detect fraud using various data‐mining techniques, the difference in misclassification costs is seldom considered. In this study, we propose a cost‐sensitive cascade forest fraud detection, which places heavy penalty on false negative prediction and self‐adjusts the depth of a cascade forest according to the classifier’s recall. As missing values are ubiquitous in fraud research, we also explore the effect of selected missing data treatments on prediction performance, including complete case analysis, three selected classic statistical mechanisms zero, mean, and modified mean imputation, and two machine learning K‐nearest neighbour and random forest approaches. The experimental results show that the proposed CSCF significantly improves the fraud prediction in comparison with one of the latest fraud detection models using the RUSBoost algorithm. Comparing different missing value treatments, even though RUSBoost and CSCF perform well when using complete case analysis, we find that the best performance is achieved when CSCF is used with missing data imputed as zero. Such treatment further improves the performance, and results in an area under curve score of 0.82 compared to the highest AUC from the baseline model. Supplementary analysis further reveals that the low AUC of complete case analysis for the two examined models persists under different training sizes.
Corporate social responsibility and financial fraud:
Lin Liao. et al (2023) states that he impact of corporate social responsibility (CSR) on corporate financial fraud in China. We find that CSR scores are negatively associated with fraudulent financial activities, suggesting that CSR firms are less likely to engage in financial fraud. The results also indicate that the negative relation is more significant for CSR performance than CSR disclosure. Additionally, we demonstrate that the negative effect of CSR is more pronounced for firms with voluntary CSR practices, continuous CSR engagements, financial pressure and internal control weaknesses. Overall, we find that CSR is an ethical behaviour that reduces financial misconduct.
Conclusion:
The identification, prevention and minimisation of the incidents of financial frauds is the collective responsibility of all, including citizens, government and other key regulators (such as RBI) and investigating agencies as well. Fraud is a widespread problem and can occur frequently in all sorts of contexts, the implementation of contracts for development projects are not alone and in some ways, other situations are more vulnerable. Dishonesty can form the basis of such behaviour, and if the person or people concerned can get away with it in the short and long term, it can result in sizeable rewards sometimes instantaneously. If they get away with a clearly fraudulent act but circumstances change, in many cases an investigation and prosecution can result, in part because of the political desire to demonstrate that their predecessors were not as honest and law-abiding as was their image at the time.
Fraud is a crime that takes different forms and has adverse effects on the global economic financial systems. When financial systems engage in fraud, customers lose trust in them and shun them. Such financial systems have trouble in operating since their lending business goes down and they cannot realize projected profits.
Insurance fraud is threatening the average person since such companies have increased the price of their premiums to take care of the fraud directed at them.
Relevant authorities must act swiftly to prevent fraud. In addition, legislation must be in place spelling stiff penalties for fraudsters since they really affect the financials systems, which are a backbone to the economy. Financial systems too, must engage their employees and discourage them from such acts of fraud to guard their integrity and maintain their businesses.
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