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Predicting Material Accounting Manipulations
Patricia M Dechow, The University of Michigan
Weili Ge, The University of Washington
Chad R Larson, The University of Michigan
Richard G Sloan, The University of Michigan
ABSTRACT. We provide a comprehensive analysis of accounting manipulations disclosed between 1982 and 2005. We create our database through a detailed examination of 2,191 SEC Accounting and Auditing Enforcement Releases. We examine the characteristics of manipulating firms and analyze the ability of (i) financial statement variables; (ii) off-balance sheet and non-financial statement variables; and (iii) market-related variables, to explain and predict manipulations. The financial statement variables that we find useful include measures of accrual quality and firm performance. The useful off-balance sheet and non-financial variables include the existence and use of leases, abnormal changes in employees and order-backlog. The useful market-related variables include book-to-market, earnings-to-price, prior stock performance, and amount of new financing. We also develop a model to predict manipulations and provide an associated Fraud-Score (F-Score) that can be used to identify manipulations.
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