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Detecting falsified financial statements: a comparative study using multicriteria analysis and multivariate statistical techniques

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  • Ch. Spathis
  • M. Doumpos
  • C. Zopounidis

Abstract

Falsifying financial statements involves the manipulation of financial accounts by overstating assets, sales and profit, or understating liabilities, expenses or losses. This paper explores the effectiveness of an innovative classification methodology in detecting firms that issue falsified financial statements (FFS) and the identification of the factors associated to FFS. The methodology is based on the concepts of multicriteria decision aid (MCDA) and the application of the UTADIS classification method (UTilites Additives DIScriminantes). A sample of 76 Greek firms (38 with FFS and 38 non-FFS) described over ten financial ratios is used for detecting factors associated with FFS. A jackknife procedure approach is employed for model validation and comparison with multivariate statistical techniques, namely discriminant and logit analysis. The results indicate that the proposed MCDA methodology outperforms traditional statistical techniques which are widely used for FFS detection purposes. Furthermore, the results indicate that the investigation of financial information can be helpful towards the identification of FFS and highlight the importance of financial ratios such as the total debt to total assets ratio, the inventories to sales ratio, the net profit to sales ratio and the sales to total assets ratio.

Suggested Citation

  • 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.
  • Handle: RePEc:taf:euract:v:11:y:2002:i:3:p:509-535
    DOI: 10.1080/0963818022000000966
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. Spathis, Charalambos & Doumpos, Michael & Zopounidis, Constantin, 2003. "Using client performance measures to identify pre-engagement factors associated with qualified audit reports in Greece," The International Journal of Accounting, Elsevier, vol. 38(3), pages 267-284.
    3. Shirley Wong & Sitalakshmi Venkatraman, 2015. "Financial Accounting Fraud Detection Using Business Intelligence," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(11), pages 1187-1207, November.
    4. 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.
    5. Ioannis Tsalavoutas & Paul André & Lisa Evans, 2009. "Transition to IFRS and value relevance in a small but developed market: A look at Greek evidence," Post-Print halshs-00460532, HAL.
    6. George Iatridis & Panayotis Alexakis, 2012. "Evidence of voluntary accounting disclosures in the Athens Stock Market," Review of Accounting and Finance, Emerald Group Publishing, vol. 11(1), pages 73-92, February.
    7. Oriol Amat & Jordi Perramon & Ester Oliveras, 2003. "Earnings management in Spain. Some evidence from companies quoted in the Spanish stock exchange," Economics Working Papers 677, Department of Economics and Business, Universitat Pompeu Fabra.
    8. Iatridis, George Emmanuel, 2011. "Accounting disclosures, accounting quality and conditional and unconditional conservatism," International Review of Financial Analysis, Elsevier, vol. 20(2), pages 88-102, April.
    9. George Iatridis & Konstantia Dalla, 2011. "The impact of IFRS implementation on Greek listed companies: An industrial sector and stock market index analysis," International Journal of Managerial Finance, Emerald Group Publishing, vol. 7(3), pages 284-303, June.
    10. Pasiouras, Fotios & Gaganis, Chrysovalantis & Zopounidis, Constantin, 2007. "Multicriteria decision support methodologies for auditing decisions: The case of qualified audit reports in the UK," European Journal of Operational Research, Elsevier, vol. 180(3), pages 1317-1330, August.
    11. repec:gam:jsusta:v:10:y:2018:i:2:p:513-:d:131948 is not listed on IDEAS
    12. Fen-May Liou, 2008. "Fraudulent financial reporting detection and business failure prediction models: a comparison," Managerial Auditing Journal, Emerald Group Publishing, vol. 23(7), pages 650-662, July.
    13. Ioannis Tsalavoutas & Lisa Evans, 2010. "Transition to IFRS in Greece: financial statement effects and auditor size," Managerial Auditing Journal, Emerald Group Publishing, vol. 25(8), pages 814-842, September.
    14. Jerry Sun & Steven F. Cahan & Jing Xu, 2016. "Individual Auditor Conservatism After CSRC Sanctions," Journal of Business Ethics, Springer, vol. 136(1), pages 133-146, June.
    15. repec:gam:jsusta:v:10:y:2018:i:2:p:522-:d:132020 is not listed on IDEAS
    16. Ioannis Asimakopoulos & Dionysis Lalountas & Costas Siriopoulos, 2008. "The determinants for the survival of firms in the Athens Exchange," Economic Bulletin, Bank of Greece, issue 31, pages 07-30, November.

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