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.
REFERENCES
Aczel, A., & Sounderpandian, J. (2006). Hill Irwin. Albrecht, W. S., Albrecht, C. C., & Albrecht, C. O. (2006). OH: Thomson South-Western. Association of Certified Fraud Examiners. (2008). and abuse. Austin, TX: Association of Certified Fraud Examiners. Beneish, M. (1999). The detection of earn 24-36. Retrieved from ProQuest Multiple databases. doi:ProQuest Doc ID 45575116 Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting Review, 70, 193 Elrod, H. (2010). Examination of Earnings and Cash Flows as Indicators of Fraud. Philosophy Dissertation, Northcentral University, Prescott Valley, AZ. Financial Accounting Standards Board. (1978). Statement of Financial Accounting Concepts No 1. Norwalk, CT: Financial Accounting Standards Board. Lee, T. A., Ingram, R. W., & Howard, T. P. (1999). The difference between earnings and operating cash flow as an indicator of financial reporting fraud. Accounting Research, 16, 749 doi:ProQuest document ID 53448465 Maier, A. (2009). Speech of Children with C left Lip and Palate: Automatic Assessment Ingenieur Dissertation, Universitat Erlangen from http://peaks.informatik.uni Public Company Accounting Reform and Investor Protection Act, 15 U.S.C. 7201 (2002 July 30, 2002). Sessions, W. (1990). The FBI's war on bank fraud: Facts and figures. Retrieved from Business Source Elite database. Journal of Finance and Accountancy Fraudulent financial, Page 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, etc. Such unexplained substantive 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. Aczel, A., & Sounderpandian, J. (2006). Complete business statistics (6th ed.). Boston: McGraw Albrecht, W. S., Albrecht, C. C., & Albrecht, C. O. (2006). Fraud examination (2nd ed.). Mason, Western. Association of Certified Fraud Examiners. (2008). Report to the nation on occupational fraud Austin, TX: Association of Certified Fraud Examiners. Beneish, M. (1999). The detection of earnings manipulation. Financial Analysts Journal, 55 36. Retrieved from ProQuest Multiple databases. doi:ProQuest Doc ID 45575116 Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. , 193-225. Examination of Earnings and Cash Flows as Indicators of Fraud. Philosophy Dissertation, Northcentral University, Prescott Valley, AZ. Financial Accounting Standards Board. (1978). Statement of Financial Accounting Concepts No 1. Norwalk, CT: Financial Accounting Standards Board. Lee, T. A., Ingram, R. W., & Howard, T. P. (1999). The difference between earnings and operating cash flow as an indicator of financial reporting fraud. Contemporary , 749-786. Retrieved from Business Source Elite database. doi:ProQuest document ID 53448465 Speech of Children with C left Lip and Palate: Automatic Assessment Ingenieur Dissertation, Universitat Erlangen-Nurnberg, Erlangen, Germany. Retrieve from http://peaks.informatik.uni-erlangen.de/maier.pdf. Public Company Accounting Reform and Investor Protection Act, 15 U.S.C. 7201 (2002 July Sessions, W. (1990). The FBI's war on bank fraud: Facts and figures. Challenge, 33 etrieved from Business Source Elite database. Journal of Finance and Accountancy Fraudulent financial, Page 5 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
Financial Accounting Standards Board. (1978). Statement of Financial Accounting Concepts No. Lee, T. A., Ingram, R. W., & Howard, T. P. (1999). The difference between earnings and Contemporary Retrieved from Business Source Elite database. Speech of Children with C left Lip and Palate: Automatic Assessment Doktor- Nurnberg, Erlangen, Germany. Retrieved Public Company Accounting Reform and Investor Protection Act, 15 U.S.C. 7201 (2002 July Challenge, 33(4), 57-59. 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 .