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Detecting and Predicting Financial Statement Fraud: The Effectiveness of the Fraud Tirangle

Author: YuPing
Tutor: LiQing
School: Jilin University
Course: Accounting
Keywords: Financial Statement Fraud The Fraud Triangle Detecting Fraud
CLC: F231.5
Type: Master's thesis
Year: 2012
Downloads: 252
Quote: 0
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Abstract


The result of financial statement fraud is serious. From the21th,a series offinancial statement fraud scandals comes up. Tens of thousands of$market valuedisappear. The capital market filled with financial fraud clouds. The confidence thatinventors and the social public face to accounting, auditing department fells to itslowest point.Financial fraud is the accounting entity with purpose,and consciousbehavior. It is problem concerned by every aspect that how market participantseffectively identify financial report fraud in time. The accounting fraud theoryincludes fraud iceberg theory, fraud triangle, GONE theory and risk factors theory.AICPA and CICPA both make relevant standards based on the three factors of thefraud triangle (SAS NO.99and auditing standard NO.1141). The triangle theory hasobvious advantages in detection of financial statement fraud. According to the auditstandard NO.1141about the specific example for the three factors, the paper intendsto create a effective model,suitable for Chinese circumstance, and at the same time itrefers to the other scholars’ achievements.The samples of the paper come from the listed companies in Shenzhen and Shanghaistock exchange punished by CSRC from2003to2011. The paper chooses thevariables based on the fraud triangle and the specific example of auditing standardNo.1141. Using binary Logistic model, the paper intends to discover the regularrelationship between the fraud and the variables from the empirical study.Theempirical findings show three conclusions. Firstly, in the pressure factor, there issignificant difference between the fraud company and the non-fraud company inaccounts receivable turnover. Secondly, in the opportunity factor, there is significantdifference between the fraud company and the non-fraud company in controllingshareholders nature. Thirdly, in the excuse factor, there is no significant difference between the fraud company and the non-fraud company in the audit opinion type. Itmeans that the public accounting firms in China do not have proper role in thesupervision of the financial fraud. The CPA may give the wrong auditing opinionunder the pressure of competition in the market. When the auditor does not give theopinion catering to the management, he may be fired.Through the empirical research results, this paper puts forward relevant suggestionsand advice. Facing to the pressure, an enterprise should pay attention to their mainbusiness to develop and enhance their core competitiveness and have the rightattitude, not to focus on how to whitewash financial report in order to meet therequirements of the stakeholders. We should reduce the cost of the small andmedium shareholders’ supervisory. The way of supervisory is to develop theinstitutional investors. According to strengthening the supervisory of the controllingshareholder, it is better to guard against financial statement fraud. In the externalsupervision, we should strengthen the public accounting firm’s standard management,and improve the professional level and professional moral of the CPA.

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CLC: > Economic > Economic planning and management > Accounting > Accounting bookkeeping method > Accounting statements
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