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Financial statement fraud has had the most significant monetary impact on companies compared to the other categories of fraud. Over half of the financial statement frauds were committed through improper revenue recognition. According to a survey of 652 companies, revenue provides the greatest risk and impact to financial statements. The revenue recognition rules published by IFRS will not alleviate this concern. The purpose of this study is to analyze whether two analytical procedures described in fraud examination textbooks correctly identify known earnings manipulators.
FINANCIAL STATEMENT FRAUD
According to the Association of Certified Fraud Examiner's "Report to the Nation 2010" less than five percent of the total fraud reported by its respondents was categorized as financial statement fraud with a median loss of $4,000,000. In contrast, asset misappropriation is 90% of total fraud reported with a median loss of $135,000. A third of the total fraud reported is categorized as corruption with a median loss of $250,000. Several fraud cases included schemes in more than one category.
A major motivation for financial statement fraud is earnings management. When companies intentionally violate generally accepted accounting principles (GAAP) through earnings manipulation it is considered fraudulent financial reporting. Arthur Levitt, former Chairman of the SEC, believes that both earnings management within and outside of GAAP has a similar effect. The SEC's investigations and enforcement actions that require the restatements of these financial statements is considered fraud (Giroux 2004). Earnings management and its detection are areas that are of most interest to accounting professionals. Akers, Giacomino and Bellovary (2007, p. 65), defined earnings management as follows:
Earnings management is recognized as attempts by management to influence or manipulate reported earnings by using specific accounting methods (or changing methods), recognizing one-time non-recurring items, deferring or accelerating expense or revenue transactions, or using other methods designed to influence short-term earnings.
According to Giroux (2004) there are three main reasons why management manipulates earnings: debt obligations, executive bonuses, and meeting stock analysts' expectations. The detection of earnings manipulation is important because earnings management adversely affects the economic decisions of external users of the financial statements: investors and creditors. In contrast to other categories of fraud, financial statement fraud does not necessarily involved the removal of cash. This does not necessarily mean that...