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FALSE FINANCIAL STATEMENTS: CHARACTERISTICS OF CHINA'S LISTED COMPANIES AND CART DETECTING APPROACH
BELINNA BAI1; JEROME YEN2; XIAOGUANG YANG3
2008
Source PublicationInternational Journal of Information Technology and Decision Making
ISSN0219-6220
Volume7Issue:2Pages:339-359
Abstract

False Financial Statements (FFS) have long been a serious problem in China and other Asian countries, which significantly dampen the confidence of the investors. Regardless of listed companies or non-listed companies, the percentage of financial statements that contained false information is quite high, which is one of the major reasons why China stock markets moved in the opposite direction towards its wonderful economic growth over the past few years. The objective of this research is to introduce one statistical technique - Classification and Regression Tree (CART), to identify and predict the impacts of FFS. We survey financial statements manipulation tricks, FFS indicators and FFS detection techniques from both China and international perspective, and further look into ten listed companies with known FFS history in China; combining these findings, we propose key indicators to work with CART.

Our analysis includes 24 false financial reports, and 124 non-false financial reports. We use CART to develop two FFS detecting models: CART without industry benchmark and CART with industry benchmark. For supporting comparison, we also build a Logit regression which is a commonly used technique in FFS detecting. We find that CART is effective in distinguishing FFS from non-FFS. Both CART models achieve better accuracy in identifying fraud cases and making predictions than Logit regression does, and CART with industry benchmark is slightly better than CART without benchmark, but it does not always have superior performance. Our CART model also tries to capture the indicators and their combinations that could reflect firms with high possibility of FFS in China.

KeywordClassification And Regression Tree Industry Benchmark False Financial Statements China's Listed Companies
DOI10.1142/S0219622008002958
Indexed BySSCI
Language英语
WOS Research AreaComputer Science ; Operations Research & Management Science
WOS SubjectComputer Science, Artificial Intelligence ; Computer Science, Information Systems ; Computer Science, Interdisciplinary Applications ; Operations Research & Management Science
WOS IDWOS:000257387900009
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Cited Times [WOS]:18   [WOS Record]     [Related Records in WOS]
Document TypeJournal article
CollectionFaculty of Business Administration
DEPARTMENT OF ACCOUNTING AND INFORMATION MANAGEMENT
Affiliation1.Credit Department, Agriculture Bank of China (HK Branch), 23/F, Tower 1, Admiralty Centre, Hong Kong
2.Department of Finance, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
3.Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing, 100080, China
Recommended Citation
GB/T 7714
BELINNA BAI,JEROME YEN,XIAOGUANG YANG. FALSE FINANCIAL STATEMENTS: CHARACTERISTICS OF CHINA'S LISTED COMPANIES AND CART DETECTING APPROACH[J]. International Journal of Information Technology and Decision Making,2008,7(2):339-359.
APA BELINNA BAI,JEROME YEN,&XIAOGUANG YANG.(2008).FALSE FINANCIAL STATEMENTS: CHARACTERISTICS OF CHINA'S LISTED COMPANIES AND CART DETECTING APPROACH.International Journal of Information Technology and Decision Making,7(2),339-359.
MLA BELINNA BAI,et al."FALSE FINANCIAL STATEMENTS: CHARACTERISTICS OF CHINA'S LISTED COMPANIES AND CART DETECTING APPROACH".International Journal of Information Technology and Decision Making 7.2(2008):339-359.
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