DETECTION OF FRAUDULENT FINANCIAL REPORTING USING FINANCIAL RATIOS

Abstract

Purpose The purpose ofthe research work is to study the indication and detection offraudulentfinancial reporting in thefinancial statements ofthe company using ratios analysis. Methodology & Design The research method is used by considering the study objectives and ease ofthe data collection. Thus, the deductive approach, explanatoiy study and secondaiy sources have been used to conduct this research. A sample size consists of 14 companiesfrom Insurance, Manufacturing sectors registered with SECT and listed on Pakistan Stock exchange. The sample of companies consist of 7 companies involved infraudulent reporting ofwhich 3 arefrom insurance sector and 4 arefrom manufacturing sector and alleged by SECP via show cause notices and 7 companies ofwhich 2 are from insurance sector and 5 are from manufacturing sector not involved in any fraudulent reporting. The number offinancial ratios observations consists of 70 samples which includes yearly data rangesfrom 2014 to 2018 (five years) for each 14 companies taken as sample. These financial information was taken from annual reports of the sample companies. The outcomes have been reached by using the quantitative data analysis tools. Regression and correlation test was performed on 70 observations from 14 companies using SPPS data analysis tool. Findings As a whole, the research concludes that there is the mean ofthe ratios offraudulent and non fraudulentfirm have a significant difference between them and secondly thefinancials ratios are the significantpredictors offraudulentfinancial reporting. Limitations ! • The research is limited to five key financial variables namely Liquidity, Financial leverage, Asset composition, Profitability, Asset turnover which are further sub categorizes to 8 measure to find results. • Research sample size limited to the years from 2014 to 2018. • Limited to the yearly dataforfive years’ period • Limited to the companies listed at PSXand registered with SECP. • Limited time and resources available to conduct the study. Recommendations The recommendations made in the study are listed below: • Investors are recommended to make investments in gold as it benefits the both stocks. • this study provides a recommendation for the auditors or fraud investigator that in order to get an indication of fraudulent financial reporting while analyzing the financial statements of the companies they can do mean calculation of financial ratios and get them compared with industry norms or competitor's results or past trends • The research study provides results that can be used by the shareholders and other stakeholders ofthe company in order to access thefinancialperformance ofthe company and managements competence. • Financial ratios of a company are the significant indicators of fraudulent financial reporting as per this research the ratios of Total debt/ Total equity, Current Assets / Total Assets and Receivables / Revenue are among the most significant ratios that can indicate the misrepresentation in the financial statements of a company