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Fraudulent financial reporting and cash flows

University of the Incarnate Word


University of the Incarnate Word
ABSTRACT
Financial statement fraud in the United States
(Association of Certified Fraud Examiners, 2008)
that correlations between (a) cash flows from operating activities and (b) earnings from
continuing operations were different for firms with detected
to firms without detected financial reporting fraud. This information may be important to
auditors, security analysts, investors, regulators, and other users of financial statement
information. The study included analysis
a fraud sample of firms with detected fraudulent financial reporting, compared to a control group
sample of firms without detected fraudulent financial reporting.
For the control group the correlatio
income from continuing operations was
.45 for the fraud group. The difference in the r values was significant and the hypothesis of
equality of the correlations was rejected (z = 25.05, a = .05, p (2
Recent historic relationships between cash flows from operating activity and income
from continuing operations may be examined, taking note of unexplained changes. Unexplained
substantive changes in the relationship between cash flows from operating activities and earnings
from continuing operations may be taken as warranting further examination and investigation
Keywords: Fraud, financial reporting, cash flows, accounting.

Journal of Finance and Accountancy
Fraudulent financial, Page
Fraudulent financial reporting and cash flows

Henry Elrod
University of the Incarnate Word

Megan Jacqueline Gorhum
University of the Incarnate Word


Financial statement fraud in the United States may average $100 billion per year
(Association of Certified Fraud Examiners, 2008). This study was to determine the
between (a) cash flows from operating activities and (b) earnings from
different for firms with detected financial reporting fraud compared
cted financial reporting fraud. This information may be important to
auditors, security analysts, investors, regulators, and other users of financial statement
information. The study included analysis of the correlations between the dependent variables for
a fraud sample of firms with detected fraudulent financial reporting, compared to a control group
sample of firms without detected fraudulent financial reporting.
For the control group the correlation between cash flow from operating activities and
income from continuing operations was positive and strong, at .96, and positive but moderate at
.45 for the fraud group. The difference in the r values was significant and the hypothesis of
correlations was rejected (z = 25.05, a = .05, p (2-tailed test) 0.0).
Recent historic relationships between cash flows from operating activity and income
from continuing operations may be examined, taking note of unexplained changes. Unexplained
ve changes in the relationship between cash flows from operating activities and earnings
from continuing operations may be taken as warranting further examination and investigation

Keywords: Fraud, financial reporting, cash flows, accounting.
Journal of Finance and Accountancy
Fraudulent financial, Page 1
Fraudulent financial reporting and cash flows
average $100 billion per year
. This study was to determine the extent, if any,
between (a) cash flows from operating activities and (b) earnings from
financial reporting fraud compared
cted financial reporting fraud. This information may be important to
auditors, security analysts, investors, regulators, and other users of financial statement
of the correlations between the dependent variables for
a fraud sample of firms with detected fraudulent financial reporting, compared to a control group
n between cash flow from operating activities and
positive and strong, at .96, and positive but moderate at
.45 for the fraud group. The difference in the r values was significant and the hypothesis of
tailed test) 0.0).
Recent historic relationships between cash flows from operating activity and income
from continuing operations may be examined, taking note of unexplained changes. Unexplained
ve changes in the relationship between cash flows from operating activities and earnings
from continuing operations may be taken as warranting further examination and investigation
INTRODUCTION

Auditors, accountants, investors,
statements free of material misstatement, whether caused by error or fraud
Standards Board, 1978), and therefore are interested in identifying fraudulent financial reporting.
Financial statement fraud in the United States is estimated to average $100 billion per year
(Association of Certified Fraud Examiners, 2008)
examine the extent to which analysis of the r
activities and (b) earnings from continuing operations might be used to detect financial reporting
fraud.
Financial statement fraud has become a problem in the United States
& Albrecht, 2006; Sessions, 1990; Wells, 1997)
committed by WorldCom, Enron, and others,
the response of the United States Congress enactment
Company Accounting Reform and Investor Protection Act," 2002)
losses in the United States may be as much as $994 billion per year, and financial statement
reporting fraud may average as much as $
Examiners, 2008).
The central premise of the research was to examine the extent to which analys
relationship between (a) cash flows from operating activities
operations may be used to detect financial reporting fraud. Th
from operating activities and earnings from continuin
the research because of the simplicity
tool for stakeholder users of financial statements.
principles of double entry bookkeeping, financial statement users grasp the relationship of these
two elements, and acknowledge, at least for fraud involving revenue recognition and accounts
receivable, financial statement reporting fraud is an independent variable that should affect the
relationship of cash flows and earnings. In its simplest form, for instance, if fictitious sales are
recorded as credit sales, the receivables will not convert into cash receipts,
between cash flows from operating activities and earnings from continuing operations will be
disrupted.
Two research questions were developed to guide the focus of the statist
relationship between cash flows from o
operations:
Q1: To what extent, if any,
operating activities and (b) earnings from continuing operations?
Q2: To what extent, if any,
activities and (b) earnings from continuing operations
reporting fraud compared to firms without detected financial reporting fraud?
Previous research (Elrod, 2010)
tests, did not show significant differences in the ratios
earnings from continuing operations
compared to a control group without identified financial reporting fraud
was intended to build on the work of Beneish
Elrod, to determine whether cash flows from operating activities and earnings from continuing
operations were indeed statistically related, and whether that relationship was different for firms
Journal of Finance and Accountancy
Fraudulent financial, Page
investors, financial analysts, regulators, and others
statements free of material misstatement, whether caused by error or fraud (Financial Accounting
, and therefore are interested in identifying fraudulent financial reporting.
in the United States is estimated to average $100 billion per year
(Association of Certified Fraud Examiners, 2008). The research reported in this paper
examine the extent to which analysis of the relationship between (a) cash flows from operatin
(b) earnings from continuing operations might be used to detect financial reporting
Financial statement fraud has become a problem in the United States (Albrecht, Albrecht,
& Albrecht, 2006; Sessions, 1990; Wells, 1997). The recent media attention of the fraud
WorldCom, Enron, and others, have brought the issue into public view, as seen by
he response of the United States Congress enactment of the Sarbanes-Oxley Act
Company Accounting Reform and Investor Protection Act," 2002). The Occupational fraud
losses in the United States may be as much as $994 billion per year, and financial statement
reporting fraud may average as much as $100 billion per year (Association of Certified Fraud
The central premise of the research was to examine the extent to which analys
(a) cash flows from operating activities and (b) earnings from continuing
used to detect financial reporting fraud. These dependent variable
from operating activities and earnings from continuing operations, were chosen for the focus of
simplicity if the idea: a simple measure may become a more practical
tool for stakeholder users of financial statements. By intuition based on understanding of the
principles of double entry bookkeeping, financial statement users grasp the relationship of these
two elements, and acknowledge, at least for fraud involving revenue recognition and accounts
statement reporting fraud is an independent variable that should affect the
relationship of cash flows and earnings. In its simplest form, for instance, if fictitious sales are
recorded as credit sales, the receivables will not convert into cash receipts, and the relationship
between cash flows from operating activities and earnings from continuing operations will be
research questions were developed to guide the focus of the statistical analysis of
relationship between cash flows from operating activities and earnings from continuing
: To what extent, if any, was there a correlation between (a) cash flows from
operating activities and (b) earnings from continuing operations?
: To what extent, if any, were the correlations between (a) cash flows from operating
activities and (b) earnings from continuing operations different for firms with detected financial
reporting fraud compared to firms without detected financial reporting fraud?
(Elrod, 2010) using quasi-experimental static pre and post treatment
did not show significant differences in the ratios cash flows from operating activities and
nings from continuing operations, for samples firms engaged in fraudulent financial reporting
compared to a control group without identified financial reporting fraud. The current
was intended to build on the work of Beneish (1999), Lee et al. (1999), Dechow et al.
cash flows from operating activities and earnings from continuing
were indeed statistically related, and whether that relationship was different for firms
Journal of Finance and Accountancy
Fraudulent financial, Page 2
s need financial
(Financial Accounting
, and therefore are interested in identifying fraudulent financial reporting.
in the United States is estimated to average $100 billion per year
reported in this paper was to
(a) cash flows from operating
(b) earnings from continuing operations might be used to detect financial reporting
(Albrecht, Albrecht,
. The recent media attention of the fraud
public view, as seen by
Oxley Act. ("Public
he Occupational fraud
losses in the United States may be as much as $994 billion per year, and financial statement
(Association of Certified Fraud
The central premise of the research was to examine the extent to which analysis of the
(b) earnings from continuing
dependent variables, cash flows
chosen for the focus of
: a simple measure may become a more practical
By intuition based on understanding of the
principles of double entry bookkeeping, financial statement users grasp the relationship of these
two elements, and acknowledge, at least for fraud involving revenue recognition and accounts
statement reporting fraud is an independent variable that should affect the
relationship of cash flows and earnings. In its simplest form, for instance, if fictitious sales are
and the relationship
between cash flows from operating activities and earnings from continuing operations will be
ical analysis of the
perating activities and earnings from continuing
s there a correlation between (a) cash flows from
between (a) cash flows from operating
different for firms with detected financial
experimental static pre and post treatment
cash flows from operating activities and
firms engaged in fraudulent financial reporting
current research
, Dechow et al. (1995) and
cash flows from operating activities and earnings from continuing
were indeed statistically related, and whether that relationship was different for firms
with financial statement reporting fraud compared to a control group without financial statement
reporting fraud. This information may be useful to auditors
detecting fraudulent financial statement reporting.

STUDY

The primary independent variable driving the
operating activities and (b) earnings from continuing operations
reporting, particularly involving revenue recognition and accounts receivable.
variables were cash flow from operating activities and earnings from continuing operations. Data
sets were drawn, including the components of the cash
from continuing operation, total assets, total revenues, and other descript
points such as company name, ticker symbol, industrial classification number, etc.
two primary data sets: (a) a control group drawn at random from a the securities listed on the
New York Stock Exchange, excluding mutual funds
investment trusts, and the like, (b) a group of companies that had engaged in financial reporting
fraud, as noted in the press and in Securities and Exchange Commission Litigation reports.
fraud group was further classified into data
the fraud group after discovery and
There is anecdotal evidence in the accounting and fraud detection literature to indicate
the size of a firm, measured either in assets or revenues, may be a component contributing to the
relative strength (weakness) of firms internal accounting control systems, and c
contributor to financial statement reporting fraud
Fraud Examiners, 2008). Additionally, Albrecht, et al. note that in financial statement reporting
fraud, the most common accounts manipulated are accounts receivable and revenues.
factor in fraud prediction models has been partially confirmed in the academic literature
(Beneish, 1999). Accordingly, in this research size was deemed a secondary independent
variable.
The null hypotheses for the research were: (a) there were no statistically significant
differences in the correlations between cash from operating activities and earnings from
continuing operations (i.e., the components of the cash ratio) among the three data
(b) there were no statistically significant differences in the correlations between the components
of the cash ratios when the data groups are subdivided according to the relative sizes of the firms
represented in each group.
Additionally, the null hypothesis of no statistical difference in the correlations between
(a) revenue and assets, (b) revenue and cash flows from operating activities, (c) revenue and
income from continuing operations, (d) assets and cash flows from operating activitie
and income from continuing operations, and (f) cash flows to income from continuing operations
was tested for the fraud sample, for firms above and below the mean assets in the sample.

RESULTS

The r values for each of the data groupings
evaluate the significance of the difference in two independent correlations
following the method recommended by Fisher
confirmed by the statistic u to evaluate the difference between two correlations
Journal of Finance and Accountancy
Fraudulent financial, Page
with financial statement reporting fraud compared to a control group without financial statement
This information may be useful to auditors, regulators, investors, and others in
detecting fraudulent financial statement reporting.
The primary independent variable driving the correlation between (a) cash flows from
operating activities and (b) earnings from continuing operations was fraudulent financial
reporting, particularly involving revenue recognition and accounts receivable. The dependent
were cash flow from operating activities and earnings from continuing operations. Data
sets were drawn, including the components of the cash flows from operating activities, income
, total assets, total revenues, and other descriptive and identifying
points such as company name, ticker symbol, industrial classification number, etc.
two primary data sets: (a) a control group drawn at random from a the securities listed on the
New York Stock Exchange, excluding mutual funds, exchange traded funds, real estate
investment trusts, and the like, (b) a group of companies that had engaged in financial reporting
fraud, as noted in the press and in Securities and Exchange Commission Litigation reports.
assified into data before restatement of their financial statements,
discovery and restatement of their financial statements.
There is anecdotal evidence in the accounting and fraud detection literature to indicate
firm, measured either in assets or revenues, may be a component contributing to the
relative strength (weakness) of firms internal accounting control systems, and ceteris paribus
contributor to financial statement reporting fraud (Albrecht, et al., 2006; Association of Certified
Additionally, Albrecht, et al. note that in financial statement reporting
, the most common accounts manipulated are accounts receivable and revenues.
factor in fraud prediction models has been partially confirmed in the academic literature
Accordingly, in this research size was deemed a secondary independent
null hypotheses for the research were: (a) there were no statistically significant
differences in the correlations between cash from operating activities and earnings from
continuing operations (i.e., the components of the cash ratio) among the three data
there were no statistically significant differences in the correlations between the components
of the cash ratios when the data groups are subdivided according to the relative sizes of the firms
the null hypothesis of no statistical difference in the correlations between
(a) revenue and assets, (b) revenue and cash flows from operating activities, (c) revenue and
income from continuing operations, (d) assets and cash flows from operating activitie
and income from continuing operations, and (f) cash flows to income from continuing operations
was tested for the fraud sample, for firms above and below the mean assets in the sample.
values for each of the data groupings are set out in Table 1. The statistic used to
evaluate the significance of the difference in two independent correlations, z, was calculated
following the method recommended by Fisher (Aczel & Sounderpandian, 2006). Results were
statistic u to evaluate the difference between two correlations, as
Journal of Finance and Accountancy
Fraudulent financial, Page 3
with financial statement reporting fraud compared to a control group without financial statement
, regulators, investors, and others in
correlation between (a) cash flows from
udulent financial
The dependent
were cash flow from operating activities and earnings from continuing operations. Data
ng activities, income
ive and identifying
points such as company name, ticker symbol, industrial classification number, etc. There were
two primary data sets: (a) a control group drawn at random from a the securities listed on the
, exchange traded funds, real estate
investment trusts, and the like, (b) a group of companies that had engaged in financial reporting
fraud, as noted in the press and in Securities and Exchange Commission Litigation reports. The
of their financial statements, and
There is anecdotal evidence in the accounting and fraud detection literature to indicate
firm, measured either in assets or revenues, may be a component contributing to the
eteris paribus, a
(Albrecht, et al., 2006; Association of Certified
Additionally, Albrecht, et al. note that in financial statement reporting
, the most common accounts manipulated are accounts receivable and revenues. Size as a
factor in fraud prediction models has been partially confirmed in the academic literature
Accordingly, in this research size was deemed a secondary independent
null hypotheses for the research were: (a) there were no statistically significant
differences in the correlations between cash from operating activities and earnings from
continuing operations (i.e., the components of the cash ratio) among the three data groups, and
there were no statistically significant differences in the correlations between the components
of the cash ratios when the data groups are subdivided according to the relative sizes of the firms
the null hypothesis of no statistical difference in the correlations between
(a) revenue and assets, (b) revenue and cash flows from operating activities, (c) revenue and
income from continuing operations, (d) assets and cash flows from operating activities, (e) assets
and income from continuing operations, and (f) cash flows to income from continuing operations
was tested for the fraud sample, for firms above and below the mean assets in the sample.
The statistic used to
, was calculated
. Results were
as computed by
the correlation comparison computation software availabl
erlangen.de/cgi-bin/usignificance.cgi
The analysis confirmed size
between the income from continuing operations and cash flow
values, presented in Table 3, compare the relationships between (a) revenue and assets, (b)
revenue and cash flows from operating activities, (c) rev
operations, (d) assets and cash flows from operating activities, (e) assets and income from
continuing operations, and (f) cash flows to income from continuing operations. The figures
above the diagonal represent results of
reporting, before restatement, with assets above the mean assets for the group. The figures below
the diagonal represent results of calculations for firms engaged in fraudulent financial reporting,
before restatement, with assets below the mean assets for the group. Table
testing the significance of the difference in the
The results of the research were that there was a predicted stat
the cash from operating activity and earnings from continuing operations components of the cash
ratio, for both the control group and the fraud sample
between cash flow from operating activ
and strong, at .96, and positive but moderate at .45 for the fraud sample. The difference in the r
values was significant and the hypothesis of equality of the correlations was rejected (z = 25.05,
a = .05, p (2-tailed test) 0.0). For the control group, as predicted, the correlations between
revenue and cash flows from operating activity, and between revenue and income from
continuing operations, were positive and strong at r = .96 and .98, respectively. For the fraud
sample, correlations between revenue and cash flow for operating activity, and between revenue
and income from continuing operations were positive and moderate, at r = .66 for the revenue to
cash flow statistic, and positive and
operations correlation. As the data in Table 2 show, the correlations fo
statistically different from those for the fraud group
values were rejected (metrics in Table 2.)
For the fraud sample, bifurcated above and below mean total assets, the correlations
between cash flows from operating activities and income from continuing operations were
positive and moderate (r = .48 above the mean and .38 below the mean), and these correlations
were not statistically different (a = .928, p (2
and 4 for the other tests and metrics.

CONCLUSION

This study confirmed the intuitive notion that
financial statements may expect a strong positive correlation between cash flows from operating
activities and income from continuing operations. These results show
cash flows from operating activities and income from continuing operations
moderate for firms with known fraudulent financial reporting involv
receivable. The differences between the strong correlations
moderate correlations in the fraud group were statistically significant. This information should be
useful to auditors, regulators, investors an
recent historic relationships between cash flow
continuing operations may be examined
Journal of Finance and Accountancy
Fraudulent financial, Page
the correlation comparison computation software available at http://peaks.informatik.uni
bin/usignificance.cgi, following the procedures outlined therein
confirmed size measured by total assets as a factor in the correlation
between the income from continuing operations and cash flows from operating activities
, compare the relationships between (a) revenue and assets, (b)
revenue and cash flows from operating activities, (c) revenue and income from continuing
operations, (d) assets and cash flows from operating activities, (e) assets and income from
continuing operations, and (f) cash flows to income from continuing operations. The figures
above the diagonal represent results of calculations for firms engaged in fraudulent financial
reporting, before restatement, with assets above the mean assets for the group. The figures below
the diagonal represent results of calculations for firms engaged in fraudulent financial reporting,
ore restatement, with assets below the mean assets for the group. Table 4 shows the results for
testing the significance of the difference in the rs from Table 3, for the hypothesis
The results of the research were that there was a predicted statistical correlation between
the cash from operating activity and earnings from continuing operations components of the cash
, for both the control group and the fraud sample. For the control group the correlation
between cash flow from operating activities and income from continuing operations was
and strong, at .96, and positive but moderate at .45 for the fraud sample. The difference in the r
values was significant and the hypothesis of equality of the correlations was rejected (z = 25.05,
tailed test) 0.0). For the control group, as predicted, the correlations between
operating activity, and between revenue and income from
continuing operations, were positive and strong at r = .96 and .98, respectively. For the fraud
sample, correlations between revenue and cash flow for operating activity, and between revenue
me from continuing operations were positive and moderate, at r = .66 for the revenue to
and weak at r = .17 for the revenue to income from continuing
operations correlation. As the data in Table 2 show, the correlations for the control group were
from those for the fraud group, and the hypotheses of equality of the r
values were rejected (metrics in Table 2.)
For the fraud sample, bifurcated above and below mean total assets, the correlations
cash flows from operating activities and income from continuing operations were
positive and moderate (r = .48 above the mean and .38 below the mean), and these correlations
were not statistically different (a = .928, p (2-tailed test) .3212) from one another
and 4 for the other tests and metrics.
the intuitive notion that, for firms without known fraud, users of
financial statements may expect a strong positive correlation between cash flows from operating
activities and income from continuing operations. These results showed the correlation
cash flows from operating activities and income from continuing operations were
moderate for firms with known fraudulent financial reporting involving sales or accounts
he differences between the strong correlations for the control group and the
moderate correlations in the fraud group were statistically significant. This information should be
useful to auditors, regulators, investors and other users of financial statements. For a given firm,
between cash flows from operating activity and income from
may be examined, taking note of changes in that relationship not explained
Journal of Finance and Accountancy
Fraudulent financial, Page 4
e at http://peaks.informatik.uni-
(Maier, 2009).
correlations
activities. The r
, compare the relationships between (a) revenue and assets, (b)
enue and income from continuing
operations, (d) assets and cash flows from operating activities, (e) assets and income from
continuing operations, and (f) cash flows to income from continuing operations. The figures
calculations for firms engaged in fraudulent financial
reporting, before restatement, with assets above the mean assets for the group. The figures below
the diagonal represent results of calculations for firms engaged in fraudulent financial reporting,
shows the results for
, for the hypothesis r
1
= r
2
.
istical correlation between
the cash from operating activity and earnings from continuing operations components of the cash
For the control group the correlation
ities and income from continuing operations was positive
and strong, at .96, and positive but moderate at .45 for the fraud sample. The difference in the r
values was significant and the hypothesis of equality of the correlations was rejected (z = 25.05,
tailed test) 0.0). For the control group, as predicted, the correlations between
operating activity, and between revenue and income from
continuing operations, were positive and strong at r = .96 and .98, respectively. For the fraud
sample, correlations between revenue and cash flow for operating activity, and between revenue
me from continuing operations were positive and moderate, at r = .66 for the revenue to
weak at r = .17 for the revenue to income from continuing
r the control group were
hypotheses of equality of the r
For the fraud sample, bifurcated above and below mean total assets, the correlations
cash flows from operating activities and income from continuing operations were
positive and moderate (r = .48 above the mean and .38 below the mean), and these correlations
ther. See Tables 3
firms without known fraud, users of
financial statements may expect a strong positive correlation between cash flows from operating
the correlations between
ere positive and
ing sales or accounts
the control group and the
moderate correlations in the fraud group were statistically significant. This information should be
. For a given firm,
from operating activity and income from
in that relationship not explained
or explainable by reference to changes in company policy such as terms of sale or credit policy,
or circumstances such as substantial change in product mix,
changes in the relationship between cash flows from operating act
continuing operations may be take

FURTHER STUDY

The magnitudes of the changes
activities and earnings from continuing o
such changes may be subjects for further study.
of studies of this kind, as well as the previous work by Dechow
(1999), and others are confounded
fraud is present are tainted, by their fraudulent natures. Such data contain fraudulent elements by
definition, including attempts by management to mask their fraudulent activities. Second, control
group data, intended to be free from fraudulent financial reporting, but being representative of
the general population, must have some fraudulent content, as yet undiscovered. Accordingly,
data from either group, fraud sample or control group, may not behave has expected.
phenomena may also warrant further study.

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changes in the relationship between cash flows from operating activities and earnings from
taken as warranting further examination and investigation.
changes in the relationship between cash flows from operating
activities and earnings from continuing operations, in the presence of fraud, and the direction of
such changes may be subjects for further study. Additional areas for further study along the lines
of studies of this kind, as well as the previous work by Dechow (1995), Benish (1999)
confounded in two ways. First, data from firms where financial reporting
fraud is present are tainted, by their fraudulent natures. Such data contain fraudulent elements by
definition, including attempts by management to mask their fraudulent activities. Second, control
d to be free from fraudulent financial reporting, but being representative of
the general population, must have some fraudulent content, as yet undiscovered. Accordingly,
data from either group, fraud sample or control group, may not behave has expected.
phenomena may also warrant further study.
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or explainable by reference to changes in company policy such as terms of sale or credit policy,
Such unexplained substantive
ivities and earnings from
further examination and investigation.
in the relationship between cash flows from operating
and the direction of
Additional areas for further study along the lines
(1999), Lee, et al.
a from firms where financial reporting
fraud is present are tainted, by their fraudulent natures. Such data contain fraudulent elements by
definition, including attempts by management to mask their fraudulent activities. Second, control
d to be free from fraudulent financial reporting, but being representative of
the general population, must have some fraudulent content, as yet undiscovered. Accordingly,
data from either group, fraud sample or control group, may not behave has expected. These two
(6th ed.). Boston: McGraw-
(2nd ed.). Mason,
Report to the nation on occupational fraud
Financial Analysts Journal, 55(5),
36. Retrieved from ProQuest Multiple databases. doi:ProQuest Doc ID 45575116
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The
Examination of Earnings and Cash Flows as Indicators of Fraud. Doctor of

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Wells, J. T. (1997). Occupational fraud and abuse.

APPENDIX

Table 1
r values for correlations among the variables as a function of fraud.

1 Revenue
2 Assets
3 Cash flow, operations
4 Income continuing operations.
M
SD

Note: Control group is above the diagonal;
diagonal; n = 594. Means and standard deviations in millions.

Table 2
z values for significance of differences in


Revenue v. assets
Revenue v. cash flows from operations
Revenue v. income from cont. operations
Assets v. cash flows from operations
Assets v. income from cont. operations
Cash flows v. income from cont. operations

Note: n for fraud sample = 594; n

Table 3
r values for correlations among the variables in the fraud sample, as a function of size.

1 Revenue
2 Assets
3 Cash flow, operations
4 Income continuing operations.
M
SD


Journal of Finance and Accountancy
Fraudulent financial, Page
Occupational fraud and abuse. Austin, TX: Obsidian Publishing Company.
values for correlations among the variables as a function of fraud.
1 2 3 4
- .77 .96 .98
.69 - .81 .80
.66 .68 - .97
Income continuing operations. .17 .28 .45 -
4.19 11.82 0.56 -0.05
12.80 61.33 4.77 3.31
Note: Control group is above the diagonal; n = 420. Fraud group before restatement is below the
= 594. Means and standard deviations in millions.
significance of differences in rs from fraud & control samples (Table 1) for
R

Fraud
sample

Control
sample

z
(=.05)
p (2
.69 .77 2.69
Revenue v. cash flows from operations .66 .96 18.03
Revenue v. income from cont. operations .17 .98 33.40
Assets v. cash flows from operations .68 .81 4.66
Assets v. income from cont. operations .28 .80 12.68
Cash flows v. income from cont. operations .45 .97 25.05
fraud sample = 594; n for control group = 420.
values for correlations among the variables in the fraud sample, as a function of size.
1 2 3 4
- .61 .67 .25
.63 - .65 .33
.50 .33 - .48
operations. .26 .25 .38 -
1.09 .97 .049 .005
3.15 1.91 .191 .275
Journal of Finance and Accountancy
Fraudulent financial, Page 6
Austin, TX: Obsidian Publishing Company.
M SD
28.95 254.41
86.83 334.32
4.88 35.97
2.33 18.35


= 420. Fraud group before restatement is below the
control samples (Table 1) for r
1
= r
2
.


p (2-tail)

<0.01 Reject
0.0 Reject
0.0 Reject
0.0 Reject
<.001 Reject
0.0 Reject
values for correlations among the variables in the fraud sample, as a function of size.
M SD
28.58 26.70
4.89 16.61
97.19 159.47
-.52 9.86


Note: Fraud group before restatement, above mean total assets is above the diagonal;
Fraud group before restatement, below mean total assets, is below the diagonal;
Means and standard deviations in millions.

Table 4
z values for significance of differences in


Revenue v. assets
Revenue v. cash flows from operations
Revenue v. income from cont. operations
Assets v. cash flows from operations
Assets v. income from cont. operations
Cash flows v. income from cont. operations

Note: n for above the mean = 67; n for below the mean =5
Journal of Finance and Accountancy
Fraudulent financial, Page
Note: Fraud group before restatement, above mean total assets is above the diagonal;
Fraud group before restatement, below mean total assets, is below the diagonal;
Means and standard deviations in millions.
significance of differences in rs from fraud sample (Table 3) for r
1

r, fraud sample

Below
mean

Above
mean

z
(=.05)
p
.61 .63 2.45
Revenue v. cash flows from operations .67 .50 1.97
Revenue v. income from cont. operations .25 .26 .081
from operations .65 .33 3.27
Assets v. income from cont. operations .33 .25 .660
Cash flows v. income from cont. operations .48 .38 .928
Note: n for above the mean = 67; n for below the mean =5 27; both from the fraud sample.
Journal of Finance and Accountancy
Fraudulent financial, Page 7
Note: Fraud group before restatement, above mean total assets is above the diagonal; n = 67.
Fraud group before restatement, below mean total assets, is below the diagonal; n = 527.
= r
2
.


(2-tail)

.4929 Reject
.4759 Reject
.0319 Accept
.4994 Reject
.2454 Accept
.3212 Accept
fraud sample.