Research On A Model For Evaluating Of Financial Statement Fraud Risk

In the recent decades, financial fraud occurred frequently and continuously in thestock market of our country, which fiercely discouraged investors, broke the fairnessof the finance market and ruined the order of the marketing economy. However,people in the world of academy have made a lot of efforts in researches on thecharacteristics, approaches, auditing methods and preventive measures of financialfraud. And fortunately, they have made great success in this field. By studying relatedthesis, it is found that prior researches made emphasis on normative study, case studyand empirical study. A large amount of positive studies have found the potentialcharacteristics of fraud enterprises and signs hidden in the financial statement. At thesame time, they designed appropriate indexes and established a lot of models for fraudrisk evaluating. These research achievements provide specific direction and a solidtheory foundation. Nevertheless, these models with complex indexes are tootheoretical to be taken into practice. Even there are several simple and specificindexes, it is hard to approach all the information only from published financialstatements and difficult to define the degree of risk. As a result, these models arehardly applied in the evaluating of financial statement fraud risk, especially for thoseinvestors who cannot obtain enough information.Considering the condition stated above, the question is that whether there is asimple and convenient model for financial statement fraud evaluating which enableusers to know the degree of fraud risk and to find the sign and cause of financialstatement fraud through published financial report. This thesis is based on the Theoryof Fraud Factors. In order to select specific indexes to establish Indicator System forFinancial Statement Fraud Risk Evaluating, the author refers to a large amount ofrelated papers and research results. In this research, there are two samples-the fraudsample and the contrast sample. The fraud sample is forty-one listed companies whichwere punished in2007by CSRC(China Securities Regulatory Commission) orcriticized by Shanghai Stock Exchange or Shenzhen Stock Exchange because ofcommitting financial statement fraud in2006. The contrast sample is other forty-onelisted companies which were rated Excellent by Shenzhen Stock Exchange because oftheir good job in financial information disclosure. The new model established in thisthesis is applied on the two samples. In the process of financial statement fraud risk evaluating, it is found that some indexes, which prove highly related in empiricalresearches, are invalid to distinguish fraud sample and excellent sample in thisindicator system. The reason is that these indexes are closely related to industry andmacro economy environment. The research result shows that fraud companies havemany common characters. For instance, most fraud companies are special treated orseriously special treated with bad operating performance, financial status and evenminus net assets. In addition to this, fraud companies have a large amount ofguarantee contrast to their net assets. Plus, in fraud companies senior operatingmanagers are unstable and some key management positions are charged by oneperson.There are five chapters in this thesis. The first chapter is Introduction, whichmainly introduces the definition of financial statement fraud, the background andreason of this research. The second chapter is Studies Review. It retrospectivelyintroduces the Theory of Fraud Factors and domestic and overseas researches on themodels for financial fraud risk evaluating in the recent decades. The next part isDesign of the Model for Financial Statement Fraud Risk Evaluating. It describes theindexes of the model in detail, the evaluation criteria and the evaluating method. Plus,there is also a example to tell you how to use the model for estimating financialstatement fraud risk. The fourth chapter is Implementing Evaluation. In this part, theModel for Financial Statement Fraud Risk Evaluating is applied on two samples(forty-one fraud companies and forty-one excellent companies). After this,comparative analysis is implemented according to the evaluation results. The lastchapter is suggestions, conclusion and limitation. It contains the advices both on howto use the Model for Financial Statement Fraud Risk Evaluating and on how to stopthe happening of financial statement fraud. Plus, this part makes a conclusion of thewhole article and some limitations of this research.The innovation of this paper is the establishment of a series of evaluationindicators that quantify the fraud risk, and the definition of evaluation criteria. Withthe model, financial statement fraud risk is graded and scored. On this basis, points ofthe comprehensive fraud risk and branched fraud risks are summed up and classifiedinto matched early warning types. This model can be used for getting to know theenvironment of corporate governance and will provide a new idea and method forevaluating financial statement fraud risk.