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Aggressive Accounting and Corporate Frauds in Malaysia

RESEARCH METHODOLOGY IN ACCOUNTING

RAC700

Aggressive Accounting and Corporate Frauds:

Probe on Malaysian Listed Companies 2007-2013

Abstraction

This survey examines the relationship between fiscal describing behaviours of the firm’s and the engagement of the firm’s in corporate frauds. The probe period merely covered from old ages 2007 to 2013 and the analysis will cover five old ages prior to the happening of fraud. It’s an through empirical observation examine whether houses pattern aggressive fiscal coverage is most somewhat involved with corporate fraud. Firm’s patterns aggressive fiscal describing determines by 1 ) Financial ratio for five old ages prior to the frauds twelvemonth 2 ) utilizing Beniesh theoretical accounts. The consequence from this survey expected to demo whether there are important relationship between house that patterns aggressive accounting and corporate frauds. Therefore, this survey contributes to the literature on the impact of fiscal describing behaviour and Corporate Frauds.

Keywords: Aggressive accounting, Corporate Frauds, and Financial ratio

Contentss

Abstraction

1.0INTRODUCTION

1.1Overview

1.1.1Financial Statement

1.1.2Corporate frauds.

1.2 Problem Statement

1.3 Research Aims

2.0 LITERATURE REVIEW

2.1 Aggressive Accounting

2.2 Corporate frauds

3.0 RESEARCH METHODOLOGY

3.1 Research Framework

3.2 Hypothesis Development

3.3 Choice of Sample

3.4 Data Collection Method

3.5 Independent Variable, Dependent Variable and Control variable

Mentions

1.0 Introduction

1.1 Overview

1.1.1 Fiscal Statement

Fiscal Statement can be specifying as a record or sum-up of the fiscal dealing activities for concern, individual or entity. Fiscal Statement should be presented in a structured and apprehensible. Basically, fiscal statement can be use by internal and external. For internal user, fiscal statement information is for direction treatment before makes any determinations. Fiscal statements include the income statement, balance sheet, statement of hard currency flow.

1.1.2 Corporate frauds.

Fiscal statement frauds can be defined as calculated misstatement or deceit or skip of fiscal statement informations intentionally to misdirect the reader and giving false feeling on organisation ‘s fiscal strength. Association of Certified Fraud Examiners ( ACFE ) defines fraud as “dishonesty or deceit by entity or person who knew that the disproof may ensue in some improper benefit to the another party” . “Falsify fiscal describing chiefly consists of manipulate necessities by overstate assets, Revenue and net income, or understate liabilities, runing disbursal, or losses”( Spathis, 2002 ) .

Chartered Institute of Management Accounting ( CIMA ) study in Topic Gateway Series no 7 stated that there a few type under corporate frauds which is abuse of history, procurance frauds, fiscal statement frauds etc. However for this survey we merely concentrate on fiscal Statement frauds. We will discourse the ground in job statement portion.

There a few motivations why concern commit fraud. First, to procure investors involvement, Obtain borrowing/financial with the Bankss, Increase bonuses or wages or they are seeking to run into analysis or outlook of analysis prognosis. Normally, there are close relationship between upper direction and corporate fraud due to fiscal statement prepared at direction degree. Base on trigon theory develop Dr Donald Cressey explain on 3 component or factor why fraudster commit frauds. First, there are visual aspects of force per unit area. Second, there perceived chance to hide the dishonest act or illegal activities. Last, there are some manner fraudsters to apologize the act as justifiable.

1.2 Problem Statement

Recently, corporate frauds instances brought attending among concern participant ; this could impact concern public presentations in many ways. Survey conducted by ACFE 2014 reveal that the victims incurred fiscal average losingss in twelvemonth 2010-2014 under fiscal statement frauds in between of US $ 1,000,000 to US $ 4,100,000. In Malaysia environment, study conducted by PricewaterhouseCoopers ( PWC ) reported that by 58 % in twelvemonth 2014 in the frequence and the fiscal impact on economic offense. Furthermore, the study besides reveal that about 10 % Malayan organisation experiences losingss more than US $ 1 Million from the twelvemonth 2013-2014. Although, Bursa Saham Malaysia and Securities Commission ( SC ) of Malaysia gave and taking earnestly on quality of fiscal coverage and continuously patterns Financial Restatement. Due to move, the houses had given a important impact on fiscal loss indirectly impact to reputation on accounting pattern.Corporate fraud causes companies to lose prospective investors and Shareholder assurance( Kamarudin, 2012 ) .Therefore, our purpose of this survey is to analyze firm’s fiscal coverage behaviour and engagement to corporate frauds

1. 3 Research Aims

The aim of this survey is to analyze firm’s fiscal coverage behaviour and engagement to corporate frauds than those that do non from grounds from Malaysian listed companies for the old ages from 2007 to 2013. Therefore, the specific aims of this survey to analyze houses who are patterns aggressive fiscal coverage are most somewhat involved with Corporate Frauds.

1.4 Scope of the Study

This survey examined companies where involved in corporate frauds and does house patterns aggressive accounting can cold-shoulder to corporate frauds? . The probe period merely cover from old ages 2007 to 2013 and the analysis will cover the five old ages continuing to the incident of frauds occur. The informations were collected from one-year reported of the each company which will be downloaded from the Bursa Malaysia web site.

2.0 LITERATURE REVIEW

2.1 Aggressive Accounting

Aggressive accounting can be define as alteration or manipulated fiscal figures from existent to want figures with purpose to taking advantage of the bing regulation or ordinance. In general, aggressive accounting is seeking to describe company’s grosss with higher so the truly sum for stand foring attractive figures to current and prospective investors. However,non all aggressive accounting patterns constitute frauds( Badawi, May 2008 ) . “In pattern, fiscal misrepresentation chiefly consists of falsify fiscal statements which include manipulate elements which is overstate assets, gross and net income, or understate liabilities, runing disbursal, or losses.”( Dalnial, Kamaluddin, Mohd Sanusi, & A ; Khairuddin, March 2014 ) .

2.2 Corporate frauds

Although we are already discus on definition of Fraud, once more CIMA specify corporate frauds as misrepresentation to make/taking advantage for oneself with venally and make loss to another. Does it is general account to explicate significance of “Frauds” . Base on CIMA study there are a few frauds can see under Corporate Frauds. Which is, Bribery and Corruption, Suspense accounting frauds, fiscal Statement frauds and etc. For this survey, we merely concentrate on fiscal statement frauds.

3.0 RESEARCH METHODOLOGY

3.1 Research Framework

3.2 Hypothesis Development

The aim is to analyze houses that pattern aggressive fiscal coverage is more likely to be involved in Corporate Frauds. Thus, the undermentioned hypotheses have been developed and stated in alternate signifiers as follows:

Hypothesis: Firms that pattern aggressive coverage are most somewhat to prosecute with Corporate Frauds.

3.3 Choice of Sample

The scrutiny of aggressive accounting and corporate frauds are based on companies listed on Bursa Malaysia from the old ages 2007 to 2013. The companies are from assorted sectors. There 2 basic choices for dependant variables which are:

  1. Choice of fiscal describing frauds houses:

The choice of the house affecting fiscal coverage frauds is obtained from the Bursa Malaysia. Basically, all house will be summarizes harmonizing to the offenses against listing of demand by Bursa Malaysia Securities Berhad, were most of the house describing material misstatement in their fiscal study. The information obtained for five old ages prior to fraud twelvemonth. First, Fraud old ages is placing. The fraud twelvemonth is the old ages were the companies commit/detect frauds. Second, four predating old ages will be obtained. For illustration, if the frauds twelvemonth happen in twelvemonth 2013, so, four twelvemonth predating old ages which is 2012,2011,2010 and 2009. Therefore, the consequence of choice will be in five old ages informations. Frauds twelvemonth informations will be abstracted from the original informations before any accommodation was made. Firms from insurances and fiscal sector will be excluded due to insufficient informations where the houses are non covering with stock list and history receivables

  1. Choice of non fiscal coverage frauds Companies:

The choice of the house is utilizing matched system. Whereby, each fraud houses will be matched with non frauds house on the footing of the clip period, Industry and size. This 3 control variable is cardinal point as house with same industry and size will as similar nature or concern environment. The information from the fiscal statement of non fraud house were obtained the same twelvemonth of the fraud twelvemonth of fraud house. In order to acquire sufficient informations, all non fraud houses besides required to hold completed fiscal informations during fiting procedure. Both house are matched with respects to: ( I ) Firm size, ( two ) Industry, and ( three ) Time period.

3.4 Data Collection Method

This survey will to the full use the secondary informations ( Published Audited Financial Report as chief beginning of information ) obtained Bursa Malaysia Berhad Media Centre. Annual studies are regarded as the chief signifier of communicating with stockholders every bit good as the populace and they are widely distributed and are the most normally produced paperss.

3.5 Independent Variable, Dependent Variable and Control variable

The informations aggregation involves an scrutiny of fraud firms’ and non-fraud firms’ informations from companies’ fiscal statements available in its one-year study. The list of the information is reported in Table 1 and Table 2:

Table 1: Measurement Independent Variables Extracted from Financial Statements for fiscal ratio

NO

Independent variable

Measurement

Abbreviation

1

Fiscal Leverage

Entire Debt/Total Equity

TD/TE

2

Entire Debt/Total Asset

TD/TA

3

Profitableness

Net Profit/Revenue

NP/REV

4

Asset Composition

Current Assets/ Total Assetss

CA/TA

5

Receivables/Revenue

REC/REV

6

Inventory / Total Assetss

INV/TA

7

Liquid

Working Capital to Total Assetss

WC/TA

8

Capital Employee turnover

Gross to Total Assetss

REV/TA

Table 2: Measurement Independent Variables Extracted from Financial Statements for Beneish Model.

Beneish theoretical account was developed by Messod D. Beneish. This theoretical account besides known’s M-Score where its mathematical theoretical account that utilizing eight fiscal ratios to place does Company has manipulated their earning.Those variables are building from the company ‘s fiscal coverage and it created a mark to explicate the extent to which the net incomes have been manipulated. This M-score most somewhat similar to Altman Z-Score, However, Altman Z-score merely concentrate on bankruptcy and M-score looking from different angle which is net incomes direction( Omar, April 2014 ).

Item

Factor

Name

Formula

Footing

1

DSRI

Days’ Gross saless in Receivables Index

Receivables / Total Gross saless

Present twelvemonth / Previous twelvemonth

2

GMI

Gross Margin Index

Gross Profit / Total Gross saless

Previous twelvemonth / Present twelvemonth

3

AQI

Asset Quality Index

( Non-Current Assets – PP & A ; E ) / Entire Assetss

Present twelvemonth / Previous twelvemonth

4

SGI

Gross saless Growth Index

Entire Gross saless

Present twelvemonth / Previous twelvemonth

5

DEPI

Depreciation Index

Depreciation / ( Depreciation + Net PP & A ; E )

Previous twelvemonth / Present twelvemonth

6

SGAI

SG & A ; A Expense Index

SG & A ; A / Revenues

Present twelvemonth / Previous twelvemonth

7

TATA

Entire Accumulations to Total Assetss

( Working Capital – Cash ) – Depreciation

Present twelvemonth / Previous twelvemonth

8

LVGI

Leverage Index

Entire Debt / Total Assetss

Present twelvemonth / Previous twelvemonth

3.5 Empirical Models and Variable Definitions

This survey used which is measured as follows:

Frauds theoretical account is stated as follows:

FFR = bo + b1 ( SIZE ) + b2 ( TD/TE ) + b3 ( TD/TA ) + b4 ( NP/REV ) + b5 ( CA/TA ) + b6 ( REC/REV ) + b7 ( INV/TA ) + b8 ( WC/TA ) + b9 ( REV/TA ) + vitamin E

Next, to mensurate the company fiscal use as per below utilizing Beneish theoretical account ( M-Score ) :

M-Score = -4.84 + 0.92*DSRI + 0.528*GMI + 0.404*AQI + 0.892*SGI + 0.115*DEPI – 0.172*SGAI + 4.679*TATA – 0.327*LVGI

Mentions

Accountant, C. I. ( May 2009 ) .Corporate fraud – Topic Gateway Series No. 57.CIMA Publisher.

Badawi, I. M. ( May 2008 ) . Motivations And Consequences Of Fraudulent Financial Reporting.the 17th Annual Convention of the Global Awareness Society International.San Francisco.

Dalnial, H. , Kamaluddin, A. , Mohd Sanusi, Z. , & A ; Khairuddin, K. S. ( March 2014 ) . Detecting Deceitful Financial Reporting through Financial Statement Analysis.Journal of Advanced Management Science Vol. 2, No. 1,.

Elmabrok Mohammed, , . A. , & A ; Ng, K.-S. ( July 2012 ) . Using Altman ‘s Model and Current Ratio to Measure the Financial Status of Companies Quoted In the Malaysian Stock Exchange.International Journal of Scientific and Research Publications,, Volume 2, Issue 7, .

Eragbhe, E. , & A ; Omoye, A. S. ( 2014 ) . Accounting Ratios and False Financial Statements Detection: Evidence from Nigerian Quoted Companies.International Journal of Business and Social Science, Vol. 5, No. 7 ( 1 ) .

Kamarudin, K. A. ( 2012 ) . Aggressive fiscal coverage and corporate fraud.Procedia – Social and Behavioral Sciences, 638 – 643.

Nelson, S. P. ( 2012 ) . Post fraud: An empirical survey of houses in Malaysia.International Journal of Management and Business Surveies, Vol. 2 ( 3 ) , pp. 059- 065.

Omar, N. ( April 2014 ) . Fiscal Statement Fraud: A Case Examination Using Beneish Model and Ratio Analysis.International Journal of Trade, Economics and Finance.

Persons, D. O. ( n.d. ) . Using Fiscal Statement Data to Identify Factors Associated with Fraudulent Financial Reporting.Journal of Applied Busines Research, Vol. 11, No 3.

PricesWaterhousecoopers. ( 2014 ) .What you do n’t can ache you.

Schick, B. M. ( 2003 ) . Are hearers sensitive plenty to fraud?Managerial Auditing Journal, 18/6/7, pp. 591-598.

Smith, G. S. ( 2012 ) . Can an hearer of all time be a first respondent to fiscal frauds?Journal of Financial Crime, Vol. 19 No. 3, pp. 291-304.

Spathis, C. T. ( 2002 ) . Detecting false fiscal statements utilizing published informations: some grounds from Greece.Managerial Auditing Journal, 179-191.

Tugas, F. C. ( November 2012 ) . A Comparative Analysis of the Financial Ratios of Listed Firms Belonging to the Education Subsector in the Philippines for the Years 2009-2011.International Journal of Business and Social Science, Vol. 3 No. 21 ; .

Warshavsky, m. ( 2012, october/november ) . forensics/fraud – net incomes Quality and the Beneish Model.Analyzing Net incomes Quality as forensic fiscal tools, pp. 16-20.

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