Abstract
The aim of this paper was to investigate the contributions of the red flags obtained from financial reports in detecting corporate fraud. The sample is comprised of 277 publicly held companies listed on B3 (Bolsa Brasil Balcão) with data from 2006 to 2018. Data and information were collected from the explanatory notes of the companies, on Refinitiv® database, on the Brazilian Securities and Exchange Commission and Federal Police Websites. Based on the Logistic Regression for panel data, the variables: auditing firm, inventory growth, liability representativeness, profitability and operational losses were analyzed. The variables were selected by taking into consideration their identified relevance in the literature as having potential to identify fraud risks. The results have shown that the red flags auditing firms and indebtedness measured by the weighting of the liabilities by the total assets contribute to the risk identification of the corporate frauds. The study contributes to the analysts, creditors and investors so that they identify companies with corporate fraud risk based on the red flags. Corporate fraud is a crime that affects all companies and the study on red flags is relevant for investors and analysts so that they identify companies with fraud signs or if the management identifies them in their early stage. The study results can influence the work of internal and external auditors, inspection bodies, investors, analysts, credit rating agencies and banking system.
References
Albrecht, W. S., & Romney, M. B. (1986). Red-flagging management fraud: a validation. Advances in Accounting.
American Institute of Certified Public Accountants (AICPA). AU section 316. Statement on Auditing Standard No. 99: Consideration of Fraud in a Financial Statement Audit. Disponível em: www.aicpa.org. Acesso em: 20 jan. 2020.
Apostolou, B., & Hassell, J. M. (1993). An empirical examination of the sensitivity of the analytic hierarchy process to departures from recommended consistency ratios. Mathematical and Computer Modelling, 17(4–5), 163–170. https://doi.org/10.1016/0895-7177(93)90184-Z
Baader, G., & Krcmar, H. (2018). Reducing false positives in fraud detection: Combining the red flag approach with process mining. International Journal of Accounting Information Systems, 31(July 2016), 1–16. https://doi.org/10.1016/j.accinf.2018.03.004
Barkemeyer, R., Preuss, L., & Lee, L. (2015). Corporate reporting on corruption: An international comparison. Accounting Forum, 39(4), 349–365. https://doi.org/10.1016/j.accfor.2015.10.001
Beneish, M. D., Lee, C. M., & Nichols, D. C., 2013. Earnings manipulation and expected returns. Financial Analysts Journal, 69(2), 57–82. https://doi.org/10.2469/faj.v69.n2.1
Burgstahler, D. C., & Dichev, I. D. (1997). Earnings, adaptation and equity value. The Accounting Review, 72(2), 187-215.
Carcello, J. V., & Nagy, A. L. (2004). Audit Firm Tenure and Fraudulent Financial Reporting. A Journal of Practice & Theory, 23 (2): 55–69. https://doi.org/10.2308/aud.2004.23.2.55
Dalla Vecchia, L. A, Mazzioni, S., Poli, O. L., & Moura, G. D. (2018). Corrupção e Contabilidade: Análise Bibliométrica da Produção Científica Internacional. Sociedade, Contabilidade e Gestão. https://doi.org/10.21446/scg_ufrj.v13i3.20033
Dal Magro, C. B., & Cunha, P. R. (2017). Red flags na detecção de fraudes em cooperativas de crédito: Percepção dos auditores internos. Revista Brasileira de Gestao de Negocios. https://doi.org/10.7819/rbgn.v19i65.2918
Dichev, I., Graham, J., Harvey, C. R., & Rajgopal, S. (2016). The misrepresentation of earnings. Financial Analysts Journal. https://doi.org/10.2469/faj.v72.n1.4
Golden, L. L., Brockett, P. L., & Wortham, G. (2013). Detecting Fraud in Accounting and Marketing. Journal of Accounting & Marketing. https://doi.org/10.4172/2168-9601.1000e122
Gullkvist, B., & Jokipii, A. (2013). Perceived importance of red flags across fraud types. Critical Perspectives on Accounting. https://doi.org/10.1016/j.cpa.2012.01.004
Hegazy, M. A. E. A., & Kassem, R. (2010). Fraudulent Financial Reporting: Do Red Flags Really Help? Recuperado de: http://ssrn.com/abstract=2011332
Horwath, C. (2011). Putting the Freud in Fraud: Why the Fraud Triangle Is No Longer Enough, IN Horwath, Crowe.
Hung, Y., & Cheng, Y. (2018). The impact of information complexity on audit failures from corporate fraud: Individual auditor level analysis. Asia Pacific Management Review, 23(2), 72–85. https://doi.org/10.1016/j.apmrv.2017.09.002
Im, C., & Nam, G. (2019). Does ethical behavior of management influence financial reporting quality? Sustainability (Switzerland), 11(20), 1 16. https://doi.org/10.3390/su11205765
Kirkos, E., Spathis, C., & Manolopoulos, Y. (2007). Data Mining techniques for the detection of fraudulent financial statements. Expert Systems with Applications, 32(4), 995–1003. https://doi.org/10.1016/j.eswa.2006.02.016
Lim, T. C., Lim Xiu Yun, J., Liu, Y., & Jiang, H. (2012). Red Flag – Characteristics of Fraudulent U.S.-listed Chinese Companies. International Journal of Management Sciences and Business Research, 1(10), 2226–8235. https://doi.org/10.5465/amr.2011.0193
Lisic, L. L., Silveri, S. D., Song, Y., & Wang, K. (2015). Accounting fraud, auditing, and the role of government sanctions in China. Journal of Business Research, 68(6), 1186–1195. https://doi.org/10.1016/j.jbusres.2014.11.013
Medrado, F. C. (2016). Indicadores Econômico-Financeiros como Red Flags de Fraudes ou Manipulação Contábil. Dissertação de Mestrado (Programa de Pós-Graduação em Ciências Contábeis / Universidade de Brasília).
Moyes, G. D. (2007). The Differences In Perceived Level Of Fraud-Detecting Effectiveness Of SAS No. 99 Red Flags Between External And Internal Auditors. Journal of Business & Economics Research (JBER), 5(6), 9–26. https://doi.org/10.19030/jber.v5i6.2551
Moyes, G. D., Young, R., & Din, H. F. M. (2013). Malaysian internal and external auditor perceptions of the effectiveness of red flags for detecting fraud. International Journal of Auditing Technology, 1(1), 91. https://doi.org/10.1504/IJAUDIT.2013.052263
Munawer, Z., Yahya, S., & Siti-Nabiha, A. K. (2012). Sell-side Security Analysts: Re-reporting of Enron Corporation Fraudulent Financial Data. Procedia - Social and Behavioral Sciences, 62, 749–760. https://doi.org/10.1016/j.sbspro.2012.09.127
Murcia, F. D.-R., & Borba, J. A. (2007). Estrutura para detecção do risco de fraude nas demonstrações contábeis: Mapeando o ambiente fraudulento. Brazilian Business Review, 4(3), 171-190.
Murcia, F. D., Borba, J. A., & Schiehll, E. (2008). Relevância dos Red Flags na Avaliação do Risco de Fraudes nas Demonstrações Contábeis: A percepção de auditores independentes brasileiros. Revista Universo Contábil, 4(1), 25-45. http://dx.doi.org/10.4270/ruc.20084
Pincus, K. V. (1989). The efficacy of a red flags questionnaire for assessing the possibility of fraud. Accounting, Organizations and Society, 14(1–2), 153–163. https://doi.org/10.1016/0361-3682(89)90039-1
Reis, E. M., Lamounier, W. M., & Bressan, V. G. F. (2015). Avoiding reporting losses: An empirical study of earnings management via operating decisions. Revista Contabilidade & Finanças, 26(69), 247–260. https://doi.org/10.1590/1808-057x201501070
Sandhu, N. (2016). Behavioural Red Flags of Fraud - A Qualitative Assessment. Journal of Human Values. https://doi.org/10.1177/0971685816650579
Sorenson, J. E., & Sorenson, T. L. (1980). Detecting Management Fraud: Some Organizational Strategies for the Independent Auditor, in Elliott, R. K. & Willingham, J. J. (eds), Management Fratuf. Detection and Deter. fence (Princeton, NJ: Petrocelli Books.
Wells, J. T. (2008). Principles of Fraud Examination. 2nd. ed. New Jersey: Wiley.
Yücel, E. (2013). Effectiveness Of Red Flags in Detecting Fraudulent Financial Reporting: An Application In Turkey. The Journal of Accounting and Finance.
Yusof, K. M. (2016). Fraudulent financial reporting: an application of fraud models to Malaysian public listed companies. The Macrotheme Review, 4(3), 126–145.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
Copyright (c) 2021 Management in Perspective