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Theoretical (2)

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Theoretical (2)Theore

    Theoretical

Dec.2005,Vo1.1,No.7(Monthly)

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    ;dernAccountingandAuditing,ISSN1548-6583,USA

    ;TheoreticalFrameworkandMethodofDetectingAccountingFraud

    ;LinlinGudieLiangShenyangUniversityofTechnology

    ;dingWangNorthGeneralPharmaceuticalFactory

    ;Abstract:Accountingfraudhasneverbeenrootedout,whichbringsalotoftroubletooursociety.Only ;throughstrengtheninguser‟sabilitytodiscern,decodeandfeedbackthefalseinformationcanwemaximally

    ;understandtheinformationbehind.Therefore,devotingourselvestosettingupaframeworkofdetectingthe

    ;accountingfraudhasbecomeafeasibleandefflcientwaytosolvethisproblem.Basedonthe”ThreeElements

    ;Theory‟‟.thispaperdemonstratesanewwaytodiscernthefraudbyresearchingitsorigins.111eauthorscombine

    ;thetheoreticalmodelandtheappliedtechnologytogethertodesignafraudrecognizationsystem. ;Keywords:fraud;ThreeElementsTheory;recognitionteehnology

    ;1.Intr0ductiOn

    ;Atthebeginningofthe21century,economywasworldwidetrappedinthe”creditmarsh”.Frequent

    ;occurrenceoftheaccountingfraudslowedtheglobaleconomicrecovery.investorsweredeceivedrepeatedlyby

    ;thefraudulentreportsdisclosedbythosecompaniesinthestockmarkets.Thecommonexistenceofaccounting

    ;fraudhasbecomeatroublingsocialproblem,whichweshouldnotonlybeawareofbutalsoexploreafeasible

    ;waytosolveit.

    ;Accountingfraudisnotisolatedandincidentallyoccurred.However,ithasneverbeenrootedoutfromour ;society.Despiteofvariouswaysoffraud,thepurposeistomakeprofitsillegallybymakingfrauds.Some ;companiesmakefraudulentreportsinordertoregisterinthestockmarket;somecompaniesmanipulatetheir

    ;revenuesbytradingwiththeirpartners,reorganizingtheirproperties,assets,andliabilities,andherebycreating

    ;„“bubbleprofits”towincreditfromtheinvestors;somestate—ownedenterprisesgetloans,bonuses,and

creditsby

    ;playingnumericalgames,whichleadstonationalcapitalloss;somecompanieshidetheirprofitsandavoidpaying

    ;taxesbymakingseveralaccountingfiles.Thegenerationofaccountingfraudisacomplicatedprocess. ;Recognizingaccountingfraudisconsequentlyasystematicproject.Currently,thereisnocommonlyaccepted

    ;theoryonaccountingfraudinChina.Thispaperfocusesondevelopingthetheoreticalresearchinthisfieldby

    ;studyingthefactorsthatmayinfluenceaccountingfraud,andtriestofindfeasiblewaystodevelopthe ;regenerationtechnology.

    ;2?ThreeElementsTheoryandAccountingFraud

    ;Accountingfraudisanactivityinwhichaccountingpoliciesviolateaccountingprinciples,tramplingon ;薯;;;;;

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    ;TheoreticalFrameworkandMethodofDetectingAccountingFraud

    ;nationallawsandregulationsinordertomakeillegalprofits.Therearevariousmotivesthatmayinvolvein

    ;accountingfraud.suchaspoliticalones,loaning,taxing,issuingstocks,refinancing,controllingstockpricesand

    ;soon.A1lthesemotivesaredrivenandhuntedbytheprincipal‟sprivateinterests.

    ;Firstly,withaneconomicpointofview,therelatedpartieswillmakedecisionsafterweighinggainsand ;losses.Thereforewhenfacingtheimperfectcontracts,principalscan‟tstandtemptationsandaccountingfraudwill

    ;happen.Secondly,lackofenvironmentcontroloffersthechancestotheexistenceofaccountingfraud.Inour

    ;cutrentaccountingsystem,alltheaccountinginformationisprocessedandsavedinsideofthecompanieswith

    ;onlylimitedexternalauditing.Underthissituation,thephenomenaofimperfectinformationwillOccur,which

    ;willstopthecompaniesfromfulfillingitssocialoptimum.Paretoimprovementcannotberealizedinthemarket

    ;andeconomicfield.Expectingtherevenueisgreaterthantheopportunitycost,theaccountingisunwillingto

    ;providethetrueinformation.Soenterprisesmakeuseofimperfectinformationtomakefraudsbyconcealingthe

    ;financialinformationanddistortingaccountinginformation.Finally,accountingfraudmustdependonthe

    ;implementationmethods.Lotsofenterprisesadoptdifferentmethodstogetillegalinterestsundersuchasituation

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    ;oflackofenvironmentcontro1.

    ;Therefore,thethreemajorindispensableelementscomposingaccountingfraudareinterest,environme

ntand

    ;implementationmethod.Enormousinterestsbecomethemotivepoweroffraud,lackofenvironmentcontrol

    ;providesthechanceformakingfraud,andvariouskindsofillegalimplementationmethodslcadtoaccounting

    ;iraud.Consequentl~interest,environmentandimplementationmethodarethreenecessaryelementsthattrigger

    ;accountingfraud.Soiftheprobabilityofoneortwoelements‟occurrenceincreases,thepossibilityofaccounting

    ;iraudwillincrease.Iftheprobabilityofallofthreeelements‟occurrenceincreases,accountingfraudwillbemore

    ;likelytohappen.Therefore,itisnotenoughtodiscernfalseaccountinginformationonlyviadealingwithits

    ;sacrificialcharacteristics.wemustalsoconsidertheinteractionsamongthethreeelements.analyzethekey

    ;factorswhichareinvolvedinthethreeelements,traceaccountingfraud,andestablishsomein.depth ;understandinginordertogivesomelogicsupporttodiscerntheaccountingfraud.

    ;3.TheDevelopmentofAccountingFraudRecognitionTeeh0ology

    ;3.1TheQuantitativeTechnologiesofDiscerningAccountingFraud

    ;Wecansetuplinearandnon?linearmodelsbystudyingdifferentdatareports,andthenmakesome ;combinationsofthesediscerningmodels,whichwillofferusabetterwaytosolvethisproblemformostofcases,

    ;Th.sisbecauseitisinfeasibletodiscerncomplicatedaccountingfraudbyonlyusingonesinglemodelifwecount

    ;reliabilityandriskin.What‟smore,everykindofmodelwillincludesomeusefulindependentinformation;hence

    ;wecan‟tfullytapoutallthevaluableeconomicinformationifweonlyuseonesinglemode1.Thecomposite

    ;discerningmodelisdesignedtosolvetheselimits.Thismodelwillcombinealltheotherdiscerningresults,thus

    ;establishitselfasthebestdiscerningmethod.

    ;Researchindicatesthattheconnectionbetweenfinancialindexandtheexistenceoffraudisuniversal,thus

    ;theexceptionalchangeoffinancialnumericalindexcanoftenexposeitstactics.Asaresult,ifwepaymore ;attentiontofinancialindex,whichreflectstheprofits,wecandiscernthemeansofmakingfraudstoagreatextent.

    ;Therefore,itisourdutytostructureastrongindexsystemwherewecandetectthefraudsbynormativeresearch,_

    ;demonstrations,nervenetworkandfuzzymethods.

    ;3.2CharacteristicSignalsofAccountingFraud

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    ;TheoreticalFrameworkandMethodofDetectingAccountingFraud

    ;Abovewementionedthatthefinancialindexishighlyrelatedwithaccountingfraud.However,financial ;indexisonlyawarningsignalandfarfromenoughtodetectfraudsalone.Weshoulddetectaccountingfrau

dfrom

    ;itsorigin,andpaymoreattentiontothethreeessentialfactors,namely,inducement,chanceandmeans.According

    ;tothenormativemethods,wecollectvarioustechnologiesandmeansbywhichtheaccountingexpertsdiscemthe

    ;frauds:Also,wedisclosethemysterioustacticsbehindaccountingfraud,andstrivetobuildupasignalseriesto

    ;discernfrauds,henceelevatingthetraditionalrecognitiontechnologytoahigherleve1. ;3,3TheFrameworkofRecognitionTechnology

    ;Weneedtotestandanalyzevariousresultsfromdifferentaspectsinordertodisclosetimexistenceof ;accountingfraudmoreaccurately.Inthispaper,throughnormativeresearch,demonstrationsandlogical ;inductions,weaimtosetupacompletetheoreticmodel,whichiscomposedofpretematuralinformationmodel,

    ;mathematicdetectivemodelandcharacteristicindexmodel,toanalyzetheinteractionsamongthefactors.Inthis

    ;way,weCallexplorethefurthertacticsandregenerationmethodsinaccountingfraud.Simultaneously,wewill

    ;provideourtechnicalsupportfordiscerningthefrauds,monitoringandadministratingtheaccountingprocess.

    ;Figure1showsUStheframeworkofthisrecognitiontechnology.

    ;Figure1TechnologicalDevelopmentforDetectingAccountingFraud

    ;4?AnalysisandDesignofAccountingFraudRecognitionSystem

    ;Sincethemeansandcharacteristicsofmakingfraudsarecomplicatedandchangeable,wecan‟tsimplyput

    ;forwardwithonesinglemodeltodealwiththisproblem.Underasituationwithimperfectinformationand ;

    ;TheoreticalFrameworkandMethodofDetectingAccountingFraud

    ;regulations,wewillfacenumerousuncertainfactors.Whileauditingtheaccountingfiles.weneedtoadopt

    ;diversifiedtestingmethodsinordertotesttheexistenceofaccountingfraudfromdifferentaspects.Nowadays.the

    ;researchondiscerningaccountingfraudinchinastillremainsitselementarylevelwiththeoreticalanalysisand

    ;preparationinitsearlyperiod.Althoughtheoreticalcircleandeconomicexpertsareworkinghardonit.they

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    ;haven‟testablishedacompletetheoryandanappliedsystem,

    ;DiscerningaccountingfraudiSakindofcomplicatedandcomprehensivemanagementactivitywherethe

    ;theoryandapplicationswillinvolvemanykindsofdisciplines,suchasnaturalscience,socialscience,engineering,

    ;systematicscience,managementscienceandSOon.Thispaperarguesthatwecancombinedifferentkindsof

    ;technologies,suchasfinance,informationtechnology,controllingandsimulationtechnologyintoonen

ewapplied

    ;technologyUponmanycasestudiesandcomparisons,mathematicstatisticsandmodelproof,Wearedetermined

    ;todesignafraudrecognitionsystem,throughwhichwecancalculateandevaluatethedata,setupstandardsfor

    ;controllingandmakingdecisions.TheprocessoftheaccountingfraudrecognitionsystemisshowninFigure2+

    ;Figure2ProcessofAccountingFraudRecognitionSystem

    ;Inordertomeetthefuqctionaldemands,wewilldividethisrecognitionsystemintofiveparts:objective, ;evaluationandanalysis.detectivesignalanddiscerning.mid?processcontrolandregulativeconduct. ;.

    ;Monitoring

    ;andpredictingtheaccountinginformationisdevelopedonthebasisofmiddlecontrolobjective.Particularly,we

    ;firstchoosesomevariablesrelatedwithaccountingfraud,changethesevariablesintomid.objectivesafter

    ;numericalprocessing;thenaccordingtothesafevalue.wewillsetupthedefaultvalueforourcase.hencegetting

    ;thecriticalvaluesatdifferentsignificantlevels.Aftersettinguptheregenerationindexsystem,thecorresponding

    ;dynamicmonitoringsystemwillstarttowork.Thisdynamicmonitoringsystemwilltracethosevariables ;.and

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    ;TheAuditOpinionofEarningsManagementinListedComp——

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    ;involvethesekindsofbehavior.

    ;f3Accrualaccountsandaccountsbelowthelinedon‟thavenotablepositiveeffectsonmodifiedopinions.It

    ;indicatesthatCPAscannotfullydiscloseirregularitiescausedbymakinguseofaccrualaccountsandaccounts

    ;belowtheline.exceptthatthelistedcompaniesdon‟tinvolvethesekindsofbehavior.

    ;(4)Theratioofaccountsreceivabletoasset,previousyear‟sauditopinion,debtratioandchangeofCPA

    ;firmshavesignificantpositiveeffectsonthemodifiedopinions,evenonmoreseriousopinions.Sizeofcompany

    ;andratioofmajorbusinessrevenuecontinuouslyhavenonotableeffectsindifferentyears.C:ashratioisnotable

    ;infullsample,buthasoppositesymbolcomparedwiththeexpectation.Besides,itseffectsarenon-consistentand

    ;non.continuous.TheeffectsofageoflistingandCPAfirmrankingarenonconsistentandnon-continuo

usin

    ;differentyears.andareinsignificant.ItshowsthatCPAshaven‟tformedstandardsandtraditionstoexptessaudit

    ;opinionssteadily,andtheauditingmarketisstillinthedynamicdevelopingperiod. ;References:

    ;1.DongpingLi,DelinHuang&ZhenlinWang.‟‟Non-clear‟AuditOpinions,EarningsManageme

    ntandChangeofCPAFirms,

    ;AccountingResearch,2001(6)

    ;2.LjjunXia,HaibinYang.CPAsReflectionontheListedCompaniesEarningsManagement,AuditingResea‟rch,2002(4)

    ;3.XiaoChen,RuiChang.EarningsManipulation,SupervisionSystemsandIndependenceofCPAs,Master‟sDegree

    ;Dissertation,SchoolofEconomic&ManagementinTsinghuaUniversity.2003,

    ;4.XiaoyueChen.XinXiao&XiaoyanGuo.PreemptiveRightsandEarningsManipulationinListedCompanies,Economic

    ;Research,2000(1)

    ;5.Haw.In-Mu,Qi.,Daqing,wu.WoodyandWeiguoZhang.EarningsManagementofListedFirmsinResponsetoSecurity

    ;RegulationsinChina‟sEmergingCapitalMarket,WorkingPaper,ChineseUniversityofHongKong,1998

    ;6.YujianLu.StudyonListedCompaniesEarningsManagementfromDistributionsofROEandROAinChina,Inquiryinto

    ;EconomicProblems,2002(3)

    ;(EditedbyHengZhuang,EricandJianfengHe)

    ;(continuedfromPage7o)

    ;makepredictionsaccordingtothecriticalvaluesatdifferentsignificantlevels.Alsothissystemwillmake ;adjustmentsuponthefeedbackinformationtocorrecttheunreasonablecriticalvalues.Inthisway,thesystemof

    ;monitoringanddiscerningaccountingfraudisabothstationaryanddynamiceffectivesystemandthediscerning

    ;functionrealizesthroughabovementionedriskmonitoring,adjustingtothefeedbackandgettingthebestresults.

    ;5.Conelusion

    ;Preciselyspeaking,accountingisnotascience,becauseitcontainslotsofestimationsandsubjective ;judgmentsintheprocessofcalculatingeconomictradesandfinancialreports.Evendealingwiththesameissue,

    ;differentpeoplemaygetdifferentconclusions.Thereforefraud-accountingrecognitionisaveryprofessionaland

    ;complicatediob.Itcannotbedonebysimplytestingthedata.Thispapershowsthatweshoulddealwith ;accountingfraudfromitsorigins.makethebestuseofThreeElementsTheorytoanalyzeallthefactorswhich

    ;maytriggertheoccurrenceofaccountingfraudandtheimpactoftheirinteractionsonaccountingfraud,and

    ;finallyconceiveafraud-recognitionsystemtakingrisksignalsandcharacteristicindcxasitsmajorbasis.

;References:

    ;I.MessodD.Beneish.TheDetectionofEarningsManipulation,FinancialAnalysisJournal,1999(8/9):24.36

    ;2.JosephWells.GhostGood:HowtoSpotPhantomInventory,JournalofAccounting,2001,Vo1.191(6):3336

    ;4.JosephWells.IrrationalRatios,JournalofAccounting,2001(8):8083

    ;5.LiuSwSpottingFalseFinancialStatementsofListedCompanies,Dalian:EconomicSciencePress,2002

    ;(EditedbyHengZhuang,EricandJianfengHe)

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