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Earnings Management and Accounting Reporting Fraud: A Theoretical Comparative Approach
Abstract
The term of earnings management is sometimes used in literature as a synonym for accounting reporting fraud. Thereby, this paper aims to review the existing literature to offer a better clarification to the primary characteristics and differentiation between earnings management and accounting reporting fraud. The results of other previous studies have been reviewed to demonstrate the results of this study using a number of alternatives available resources to the collection of the relevant literature. The findings demonstrate that the activities of manipulating financial information continue to prevail in the business environment worldwide, despite the fact that there are strict laws and regulations to prevent earnings management and fraud behaviour. Therefore, defining the motivation of managers manipulative behaviour can enable academics and regulators to establish a framework to distance between earnings management and fraud and to recognize fraudulent actions through attempting to pursue how managers act to achieve their objectives.
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The main objective of the study is to examine the perceptions of employees of banks operating in Saudi Arabia on the effectiveness of fraud prevention. A total of 150 questionnaires are distributed among employees of 12 Saudi banks with a response rate of 53.3 %. These fraud prevention strategies are classified using Cressey's fraud triangle which consists of pressure, rationalization and opportunity. The research engaged quantitative research method using questionnaire. The findings indicate that all strategies are perceived to be highly effective with strategies under the opportunity category turned out to be the most effective. However, when detailed analyses of the practices are compared across selected characteristics, various perceptions are revealed. Positive employee recognition, ethics training, imposing penalty, fraud auditing, and disciplinary action are perceived differently between male and female employees. Female employees perceive these fraud prevention policies and strategies as more effective than male employees. On the other hand, the differences in perception is found to be insignificant for working experience, qualifications, accounting experience, age group, job titles, and departments.
Abstract: The business community requires transparent corporate reports to ensure that investment decisions are not based on materially misstated financial statements. This implies that corporate managers, auditors, board of directors, investors and regulatory agencies urgently need to be able to detect and prevent potential earnings frauds. The literature review seeks to improve understanding of the fraudulent financial statement anatomy, its factors, motivations and antecedents- the knowledge of which can improve our detection and prevention ability. The “fraud triangle” is portrayed as an efficient model for understanding antecedents to fraud. Concurring with Zahra, Priem and Rasheed (2005), the paper calls for further research to understand the motivational factors of fraud behaviour as well as adopting forensic accounting techniques to enhance the probability of detecting fraud in a timely, cost effective manner.
Purpose
The purpose of this study is to examine types of fraud risk and fraud scheme methods in Greek commercial banks.
Design/methodology/approach
Data used for this study were obtained from primary source through questionnaires. This method of data collection was followed and was considered appropriate because the information sought is not publicly available and middle management and internal auditors are in a good position to know the answers to the questions asked. Questionnaires were sent to a sample of 230 persons, all bank branch employees (internal auditors were excluded), in the city of Athens (capital city of Greece), in five banks, National Bank of Greece, Piraeus Bank, Alpha Bank, Eurobank and Postal Bank, during February 2017-March 2017. Finally, of the 230 questionnaires distributed, 225 completed and returned but only 203 of them were usable questionnaires. Cronbach’s alpha was used to test the reliability of variables.
Findings
Results showed that forgeries, bribery and money laundering are the most important types of fraud risk, and the best fraud scheme methods are using dormant accounts and checks. Based on the empirical findings, the study recommends that there is a need for banks to implement a code of conduct and a code of ethics for staff, staff training, signature verification, control over dormant accounts, asking employees about their opinions and the way they feel about their bank, conducting surprise audits and using a hot line for whistleblowing.
Practical implications
The study will help banks in fraud risk management and in the development of policies to reduce risk within the banking sector. Also, will be useful to all categories of potential bank clients and users of financial services including shareholders, creditors, debtors and fund providers.
Originality/value
To the best of the authors’ knowledge, this is the first study examining middle management and staff opinions about fraud risk and fraud scheme methods in Greek commercial banks.
The paper provides a perspective on earnings management. I begin by addressing the following questions: What is earnings management? How pervasive is it? How is it measured? Then, I discuss what we, as academics, know about incentives to increase and to decrease earnings. The research presented relates to earnings management incentives stemming from regulation, debt and compensation contracts, insider trading and security issuances. I also discuss issues relating to problems in measuring the extent of earnings management and propose extensions for future work.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the 'separation and control' issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears the costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.
‘This is a book which should be read by all students, whether undergraduate and postgraduate. It also provides a succinct guide for the manager who wishes to come to grips with this topic, or the accountant nostalgic to recollect the non too praiseworthy and indecisive history of this topic’ - Managerial Auditing Journal Corporate Financial Reporting critically examines contemporary corporate financial reporting. The complexity of the reporting process and the myriad of issues facing the directors, accountants and auditors can only be successfully understood from a firm conceptual base. Recent financial scandals clearly highlight the interrelationships between all the themes explored in this book, from financial reporting to auditing, from management’s motivations to fraud. Special features of this book include: - A critical examination of accounting ‘theory’ - Senior practitioners’ insights on ‘a true and fair view’ - An exploration of ‘the financial reporting expectations gap’ - A discussion of the nature of ‘corporate performance’ - An examination of corporate fraud - An examination of the implications of ‘real-time’ reporting by companies - Discussion questions at the end of each chapter The book will be relevant to advanced undergraduate as well as postgraduate and MBA students.
This study investigates firms subject to accounting enforcement actions by the Securities and Exchange Commission for alleged violations of Generally Accepted Accounting Principles. We investigate: (i) the extent to which the alleged earnings manipulations can be explained by extant earnings management hypotheses; (ii) the relation between earnings manipulations and weaknesses in firms' internal governance structures; and (iii) the capital market consequences experienced by firms when the alleged earnings manipulations are made public. We find, that an important motivation for earnings manipulation is the desire to attract external financing at low cost. We show that this motivation remains significant after controlling for contracting motives proposed in the academic literature. We also find that firms manipulating earnings are: (i) more likely to have boards of directors dominated by management; (ii) more likely to have a Chief Executive Officer who simultaneously serves as Chairman of the Board; (iii) more likely to have a Chief Executive Officer who is also the firm's founder; (iv) less likely to have an audit committee; and (v) less likely to have an outside blockholder. Finally, we document that firms manipulating earnings experience significant increases in their costs of capital when the manipulations are made public.
In this paper we review the academic evidence on earnings management and its implications for accounting standard setters and regulators. We structure our review around questions likely to be of interest to standard setters. In particular, we review the empirical evidence on which specific accruals are used to manage earnings, the magnitude and frequency of any earnings management, and whether earnings management affects resource allocation in the economy. Our review also identifies a number of opportunities for future research on earnings management.
With an upsurge in financial accounting fraud in the current economic
scenario experienced, financial accounting fraud detection (FAFD) has become an
emerging topic of great importance for academic, research and industries. The
failure of internal auditing system of the organization in identifying the
accounting frauds has lead to use of specialized procedures to detect financial
accounting fraud, collective known as forensic accounting. Data mining
techniques are providing great aid in financial accounting fraud detection,
since dealing with the large data volumes and complexities of financial data
are big challenges for forensic accounting. This paper presents a comprehensive
review of the literature on the application of data mining techniques for the
detection of financial accounting fraud and proposes a framework for data
mining techniques based accounting fraud detection. The systematic and
comprehensive literature review of the data mining techniques applicable to
financial accounting fraud detection may provide a foundation to future
research in this field. The findings of this review show that data mining
techniques like logistic models, neural networks, Bayesian belief network, and
decision trees have been applied most extensively to provide primary solutions
to the problems inherent in the detection and classification of fraudulent
data.