Rethinking Corporate Regulation: Key Risk Indicators for Accounting Fraud Detection

• In Event: Regulation and Prevention of White-Collar Crime

Abstract

Accounting Fraud (AF) is one of the most harmful corporate crime since it is often connected to other major white-collar crimes such as organized crime, money laundering, state crime and environmental crime, resulting in massive corporate collapses commonly silenced by powerful high-status executives and managers. AF represents a significant threat to the financial system stability due to the consequential diminishing of the market confidence and trust of regulatory authorities. The catastrophic repercussions of AF expose how vulnerable and unprotected the community is in regards to this matter since most damage is inflicted to investors, employees, customers and government.

Different fraudulent tricks can be used in order to commit AF, either direct manipulation of financial items or 'creative' methods of accounting, hence the need for non-static regulatory interventions that take into account the hidden dynamic component of fraudulent reporting. Although several statistical models have been proposed to better differentiate between fraud and non-fraud firms, these are not sufficient to uncover complex fraudulent schemes and to identify early warning signs of AF.

The main contribution of this paper is to improve the detection of AF via the assessment of several financial risk indicators in order to design appropriate regulatory policies.

Author

• Maria Jofre, The University of Sydney