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A Generalized Qualitative-Response Model and the Analysis of Management Fraud

Author

Listed:
  • J. V. Hansen

    (Marriott School of Management, Brigham Young University, Provo, Utah 84601)

  • J. B. McDonald

    (Marriott School of Management, Brigham Young University, Provo, Utah 84601)

  • W. F. Messier, Jr.

    (Fisher School of Accounting, University of Florida, Gainesville, Florida 32611)

  • T. B. Bell

    (KPMG Peat Marwick, Montvale, New Jersey 07645)

Abstract

Management fraud has become a topic of increasing interest to the public accounting profession. Prior research indicates that management fraud is seldom experienced by audiGtors. As a result, it is doubtful that auditors have a well-developed cognitive model for making fraud risk assessments as part of the audit planning process. Early research studies attempted to identify factors that could be linked to the occurrence of management fraud, while more recent work has attempted to build models to predict the presence of management fraud. In this paper, we report on a study that uses a powerful generalized qualitative-response model, EGB2, to model and predict management fraud based on a set of data developed by an international public accounting firm. The EGB2 specification includes the probit and logit models and others as special cases. Moreover, EGB2 easily accommodates asymmetric costs of type I and type II errors. This is important for public accounting firms since failure to predict fraud when it is present (a type II error) is usually very costly to the firm in terms of litigation. The results demonstrate good predictive capability for both symmetric and asymmetric cost assumptions.

Suggested Citation

  • J. V. Hansen & J. B. McDonald & W. F. Messier, Jr. & T. B. Bell, 1996. "A Generalized Qualitative-Response Model and the Analysis of Management Fraud," Management Science, INFORMS, vol. 42(7), pages 1022-1032, July.
    • Handle: RePEc:inm:ormnsc:v:42:y:1996:i:7:p:1022-1032
    DOI: 10.1287/mnsc.42.7.1022
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    Citations

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    Cited by:

    1. Harold Hassink & Roger Meuwissen & Laury Bollen, 2010. "Fraud detection, redress and reporting by auditors," Managerial Auditing Journal, Emerald Group Publishing, vol. 25(9), pages 861-881, October.
    2. Mark Cecchini & Haldun Aytug & Gary J. Koehler & Praveen Pathak, 2010. "Detecting Management Fraud in Public Companies," Management Science, INFORMS, vol. 56(7), pages 1146-1160, July.
    3. Ch. Spathis & M. Doumpos & C. Zopounidis, 2002. "Detecting falsified financial statements: a comparative study using multicriteria analysis and multivariate statistical techniques," European Accounting Review, Taylor & Francis Journals, vol. 11(3), pages 509-535.
    4. Jiong Gong & R. Preston McAfee & Michael A. Williams, 2016. "Fraud Cycles," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 172(3), pages 544-572, September.
    5. Lee, Kangbok & Joo, Sunghoon & Baik, Hyeoncheol & Han, Sumin & In, Joonhwan, 2020. "Unbalanced data, type II error, and nonlinearity in predicting M&A failure," Journal of Business Research, Elsevier, vol. 109(C), pages 271-287.
    6. Sudheer Chava & Kershen Huang & Shane A. Johnson, 2018. "The Dynamics of Borrower Reputation Following Financial Misreporting," Management Science, INFORMS, vol. 64(10), pages 4775-4797, October.
    7. Galeotti, Marcello & Rabitti, Giovanni & Vannucci, Emanuele, 2020. "An evolutionary approach to fraud management," European Journal of Operational Research, Elsevier, vol. 284(3), pages 1167-1177.
    8. Qiao Wang & Li Nie, 2021. "Do Chinese listed corporations really tell the truth? Empirical evidence from semi‐parametric analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 1825-1834, April.
    9. Tobias Karmann & René Mauer & Tessa C. Flatten & Malte Brettel, 2016. "Entrepreneurial Orientation and Corruption," Journal of Business Ethics, Springer, vol. 133(2), pages 223-234, January.
    10. Abdullah Albizri & Deniz Appelbaum & Nicholas Rizzotto, 2019. "Evaluation of financial statements fraud detection research: a multi-disciplinary analysis," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 16(4), pages 206-241, December.
    11. Liu, Chengwei & Chan, Yixiang & Alam Kazmi, Syed Hasnain & Fu, Hao, 2015. "Financial Fraud Detection Model Based on Random Forest," MPRA Paper 65404, University Library of Munich, Germany.
    12. Liuyang Ren & Xi Zhong & Liangyong Wan, 2022. "Missing Analyst Forecasts and Corporate Fraud: Evidence from China," Journal of Business Ethics, Springer, vol. 181(1), pages 171-194, November.
    13. Burcu Dikmen & Güray Küçükkocaoğlu, 2010. "The detection of earnings manipulation: the three-phase cutting plane algorithm using mathematical programming," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(5), pages 442-466.
    14. Panagiotis E. Dimitropoulos & Dimitrios Asteriou, 2009. "The value relevance of financial statements and their impact on stock prices: Evidence from Greece," Managerial Auditing Journal, Emerald Group Publishing, vol. 24(3), pages 248-265, March.
    15. Sunita Goel & Jagdish Gangolly, 2012. "Beyond The Numbers: Mining The Annual Reports For Hidden Cues Indicative Of Financial Statement Fraud," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 19(2), pages 75-89, April.
    16. Jiandong Chen & Douglas Cumming & Wenxuan Hou & Edward Lee, 2016. "Does the External Monitoring Effect of Financial Analysts Deter Corporate Fraud in China?," Journal of Business Ethics, Springer, vol. 134(4), pages 727-742, April.
    17. Jared Harris & Philip Bromiley, 2007. "Incentives to Cheat: The Influence of Executive Compensation and Firm Performance on Financial Misrepresentation," Organization Science, INFORMS, vol. 18(3), pages 350-367, June.
    18. Barniv, Ran & Mehrez, Abraham & Kline, Douglas M., 2000. "Confidence intervals for controlling the probability of bankruptcy," Omega, Elsevier, vol. 28(5), pages 555-565, October.
    19. Chen, Jiandong & Cumming, Douglas & Hou, Wenxuan & Lee, Edward, 2013. "Executive integrity, audit opinion, and fraud in Chinese listed firms," Emerging Markets Review, Elsevier, vol. 15(C), pages 72-91.

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