John T. Sennetti
Nova Southeastern University
Chia-hui Chen
Nova Southeastern University
Abstract: For the computer industry we apply the strategic-systems lens approach to identify the common financial reporting characteristics of fifty-two companies accused of fraudulent financial reporting practices by the SECs Accounting and Enforcement Division during the period from September 20, 1995 to April 5, 2002. From these characteristics we create a logistic model that predicts companies susceptible to the SEC accusation of fraud. We find the out-of-sample prediction rate to be eighty-nine percent for the accused and also for the non-accused companies. Computer companies accused of fraud are likely to be so cash-starved they are unable to fund research and to promote sales. To raise cash they may overstate sales and manipulate earnings by lowering recorded expenses and achieving higher rates of return than non-fraudulent companies, even though their actual sales relative to their receivables are declining. These results provide new tools requested by Sarbanes-Oxley and SAS No. 99 for the identification of possible fraudulent reporting.
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