Financial statement comparability and accounting fraud
Researchers
- Belen Blanco,
- Sandip Dhole; and
- Ferdinand Gul
Background
The study aims to examine the relationship between financial statement comparability and accounting fraud. Fraud is a growing concern and can be costly to organisations and economies. High comparability could make it difficult for managers to commit fraud because it could be more easily detected. On the other hand, poor comparability could potentially create opportunities for fraud. The study also examines the association between comparability and fraud over a period of time leading to the discovery of the fraud. Declining comparability could indicate potential fraud in the future and raise a red flag. Thus understanding whether the association between comparability and the likelihood of fraud changes as the year of fraud approaches could potentially provide a timely warning to users.
The study also examines changes in comparability after the detection of fraud. Previous research shows that financial reporting quality improves after fraud detection as companies try to repair lost reputation. Improvements in financial reporting quality should be associated with improved comparability.
Method
The paper uses a sample of fraud cases identified by the US Securities and Exchange commision between 2000-2018 and estimates a logit model to identify the association between comparability and the likelihood of fraud.
Findings
Our findings demonstrate that companies with poor accounting comparability are more likely to commit accounting fraud, especially those with poor corporate governance and financial distress. In addition, our analysis reveals a noticeable drop in comparability in the four years leading up to fraud detection, potentially serving as an early warning sign for investors and regulators. On a positive note, our research also indicates that improvements in comparability, tend to occur four years after a fraud incident as financial reporting quality improves after fradu. Our study emphasises the importance of accounting comparability for fraud detection and prevention.