Fraudulent Financial Statements Of Chinese Listed Companies: Analysis Of The Status Quo And The Fraud-Detecting Model

In this paper, we selected 137 listed companies in China that had been subject to accounting enforcement action during 1994-2006 as the fraud sample, and then collected data about this fraud sample to depict detailedly the basic character, corporate government character, behavior character, independent audit character and sequel character of fraud companies. We found that (1) Relative to non-fraud companies, Chinese fraud companies were relatively small and endure more financial pressure; the industries affected most frequently included manufacturing, agriculture and IT industry; The area where most of the fraud companies were located are underdeveloped provinces. (2) Relative to non-fraud companies, Chinese fraud companies had relatively high percentage of current stock, low attendance of shareholders meeting, low frequency of directors meetings, low stock equity concentration degree, low largest stockholder control degree, high directors and officers' stock ownership, low directors and officers' average ages, high percentage of male directors and officers. (3) The most common techniques used to fraudulently misstate financial statement information is improper revenue recognition, and related party transaction and asset reorganization are peculiar techniques used by Chinese fraud companies. (4) Cumulative amounts of frauds were relatively large in light of the relatively small sizes of the companies involved. The financial statement frauds generally involved multiple fiscal periods. (5)Few fraud companies were detected by external auditor, many companies changed auditors during the fraud period. (6) The numbers of companies subject to accounting enforcement action had shown an increasing trend. (7)A large proportion of fraud companies had suffered special treatment, suspending or terminating the listing of the companies' shares. (8)Few fraud companies suffered substantiality punishment.Based on the status quo of financial statements fraud in Chinese capital market, we attempt to use cascaded logit analysis to establish an integrative fraud-detecting model. Firstly, under the "fraud triangle" framework, we put the proxy variables of fraud incentive, fraud opportunity and fraud rationalization into logit regression model to establish the ante-fraud warning model. Afterwards, we selected six categories financial ratios to catch the abnormal fluctuate of fraudulent financial statements, and put these financial ratios into logit regression model to establish the post-fraud detecting model. The ante-fraud warning model and post-fraud detecting model represent the first-tier models in cascaded logit analysis. Each of these first-tier models generates an index, ranging from zero to one, of risk of fraud based on the variables included in the model. Then we combined these two indices into the second-tier logit model to establish the integrative fraud-detecting model. Finally, we bring the time factor into our analysis and put the financial trend ratios into the cascaded logit regression to establish the in time fraud-detecting model. We found the concordance and classification accuracy of the in-time fraud-detecting model are higher than the integrative fraud-detecting model.