Detection of Fraudulent Financial Statement in India: An Exploratory Study

Abstract

Recently, high profile cases of financial statement fraud have been dominating the newspapers and news channels. Satyam Computers, one of biggest financial statement fraud in Indian listed companies, led by its founder, was identified in the recent past. This has eroded badly the trust of investors as well as the value of the stock price. This paper examines financial statement data of Indian Companies listed on Bombay Stock Exchange to develop a model for detecting factors associated with fraudulent financial statements (FFS). Frauds reported in financial statement are identified on the basis of the report filed by the auditors. A sample of a total of 60 firms included for drawing the model. Out of which, 30 with FFS and same is with non-FFS. Total 10 variables are selected for the examination as potential predictors of FFS. A logistic regression technique is used to develop a model to identify factors associated with FFS. This study of detecting fraudulent financial statement helps auditors, tax authorities and bankers to identify the false financial statement during the scrutiny.