| Since the opening of China's stock market, we observe a frequent break out of the financial frauds. In some extents, it has shocked the investors' confidence and has held back the healthy development of China's capital market. Recently the stock market has kept on depression, CSRC(China Securities Regulatory Commission) is going to tighten the regulation of raising fund in stock market and the stock market of middle and medium sized listed companies was just founded. All above has raised the motivation of accounting fraud. How to detect the financial statement distortions easily has raised significant attention from regulators, investors and auditors, etc.This paper presents regulatory study and empirical study on the motivations, and the means of financial fraud, and the financial ratios for identifying the accounting fraud of the listed companies in China. We have used many statistical methods include parametric estimation, nonparametric estimation and regression analysis. We finally build a model by logistic regression, which is suitable to China's capital market and is based on the public accounting information, to access the probability of financial fraud. The western academia has already had many studies on the characteristic of accounting fraud, the methods for identifying financial statements distortions and the model for detecting fraudulent financial reporting and has got plenty of significant results. The studies on financial fraud detection in China are still limited to the introduction for the academic results of the western academia and some regulatory studies. And there are few studies on model for identifying financial reports distortions.Based on the results of western and Chinese academia and on the reality of China's capital market, this paper has adopted some new experiment and creative study. It commits to bringing the newest fraud companies to the study samples to make the model more suitable for detecting the recent financial fraud. Moreover, this paper has studied on the financial ratios related to the cash flows for identifying the fraud for the first time in China and used these ratios as the important variables for building the model.Firstly, we studied on the motivation of accounting fraud of China's listed companies. Compared to the motivation of listed companies in developed market, China's listed companies have special motivations, including motivation for getting the qualification of IPO (initial public offering), for raising the publishing price, for re-funding after IPO, and for avoiding punishment. Based on the analysis on motivation of financial fraud, we have found that the most fraud goals have to be realized by distorting the financial ratios about earning abilities. So in the following text, we have an analysis on the methods of earnings manipulation, which includes affirming the revenues inappropriately, making up revenues, delaying fees and fraudulently decreasing the cost, fee or debt. Based on the above analysis, we raised two hypotheses in this paper: Accounting frauds are more likely to happen in companies with abnormal financial ratios and with bad financial conditions. Afterwards, we select 32 fraud and 32 non-fraud companies from the fraud listed companies, which have been disclosed by CSRC and three main security newspapers in China, as the study objects and do an empirical study by statistic methods. Since CSRC didn't require the listed companies to publish the cash flow statement until 1998, we take year 1998 to 2003 as the study period and take every fraudulent financial annual report as a sample. Then we've got 54 fraudulent financial reports as fraud sample and 54 non-fraudulent financial reports as control samples.I n the t test and Wilcoxon test of abnormal financial ratio variables group, we find that fraud companies have characteristics of high accounts receivable to sales, accounts receivable to current asset, account payable to cost of good sold ratio and low operating income to total income ratio. It implies...
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