Recognizing Risk Factors Affecting Fraud Probability in Financial Reporting from Auditors' Viewpoint and Its Impact on Firms' Performance

 
Journal of Accounting Advances (J.A.A)
Vol. 6, No. 1, 2014, Ser. 66/3
 
Extended Abstract
 
Recognizing Risk Factors Affecting Fraud Probability in Financial Reporting from Auditors' Viewpoint and Its Impact on
Firms' Performance
 




Dr. J. Moradi
Shiraz University


R. Rostami         R. Zare
Islamic Azad University, Marvdasht Branch




 
Introduction
       There has been a significant increase of fraud in financial reporting recent years. The occurrence of financial crisis caused by some firms such as Enron, Global Crossing and World Com, the issue of fraud in financial statements has become more important. Today the regulators pay more attention to accounting and management careers to prevent frauds in financial statements.
       Altering the financial statements includes changing its components by presenting unreal assets, sales, profit or debts, costs and losses. In cases where there is a significant alteration in the financial statements so that its components is not faithfully represented, it is considered as a fraud. Fraud is a deliberate alteration of financial statements by the management in order to mislead the investors and creditors. Wallace (1995) considers frauds as previously planned schemes in order to mislead others which can be done through fake documents.
Although there have been several studies considering fraud detection in financial statements in foreign countries, this issue has not been given much attention in Iran. The issue of fraudulent financial statements is of great importance in Iran. The increase in the accepted firms in TSE which are publishing securities in order to attract financial resources, efforts in order to decrease tax, etc. are the reasons for its importance.
The objective of the study is, on one hand, identifying effective factors on fraud use based on the auditors’ perceptions, and on the other hand, this study tries to determine risk indicators in the firms accepted in TSE and to examine their effects on the performance of the firms. It should be noted that in order to achieve the objectives of the study, the research hypotheses were divided into two groups.
By presenting the questionnaires and the results of the study, the researchers hope to help auditors to get familiar with risk factors and to detect fraud to some extent, or in other words, this study attempts to draw auditors' attention to the possibility of frauds.
 
Research Hypotheses
     The Research hypotheses are categorized and presented in two groups. The first one is to examine and identify the risk factors influencing fraud from auditors’ viewpoint. The second one examines the relation between the fraud risk index and firms' performance by extracting the fraud risk index for the selected firms. The hypotheses are as follows:
Hypothesis 1_a: There is a significant relationship between risk factors related to the management characteristics and influence with the probability of fraud.
Hypothesis 2_a: There is a significant relationship between risk factors related to following the management in internal supervision and enforceable standards with the probability of fraud.
Hypothesis 3_a: There is a significant relationship between risk factors concerning the market and industry status of the firm with the probability of fraud.
Hypothesis 4_a: there is a significant relationship between risk factors concerning operational characteristics, the company’s cash holdings and financial stability with the probability of fraud.
       The effect of the fraud risk level (probability of fraud) on firms' performance is examined by the following hypotheses (second group of hypotheses):
Hypothesis 2-1: There is a significant relationship between fraud risk index and firm performance.
Hypothesis 2-2: There is a significant difference between firms' performance regarding their fraud risk level.
Where the firm performance is calculated by four substituted variables: Return on Assets (ROA), Operational Cash Flow Ratio, Stock Market Return and Return on Equity.
 
Methodology
       The method used in the first part is descriptive–survey based on the field studies and the data gathered by questionnaires are analyzed. In the second part, the companies which had already completed the questionnaires are assessed by a regression model and correlation analysis. In this study, the One-way ANOVA and Correlation Analysis were used to test the hypotheses.
 
Results
       The findings show that the fraud risk has a significant relation with the management qualities, management following internal controls and enforceable standards, risk factors related to the market and industry conditions, operational features, company liquidity and fiscal stability; and in the second group the fraud risk is significantly related to the firm's performance.