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Article no.

An examination of anonymous and non-anonymous fraud reporting channels:
Limited information exists as to the likely effectiveness of such a channel as compared to a non-
anonymous channel. The purpose of our paper is to report the results of an experimental study
examining participants' intentions to report fraud using anonymous and non-anonymous
reporting channels given information about the outcomes from a previous non-anonymous
whistle blowing incident. The experiment manipulates the outcomes to both the previous
whistleblower and to the transgressor. (Steven E. Kaplan et al.Advances in Accounting, incorporating
Advances in International Accounting;28(2012)88-95.) We contend that the follow-through outcomes on
a previous whistle blowing incident will change either the expected costs or expected benefits to
employees as they consider using either an anonymous or non-anonymous reporting channel and
that this will affect the likelihood of whistle blowing. This is consistent with Mesmer-Magnus
and Viswesvaran (2005, p. 281) who suggest that, It is assumed that a whistleblower's
experiences (perceived or actual, reward or retaliation) following a whistle blowing event will
have strong effects on others' willingness and likelihood to blow the whistle in the future.
(Steven E. Kaplan et al.Advances in Accounting, incorporating Advances in International

Development of hypotheses and research questions:
The 2010 Association of Certified Fraud Examiners (ACFE) Report to the Nations on
Occupational Fraud and Abuse (2010, 1617) states that tips, most frequently from employees,
are the single most frequent source leading to the detection of fraud. We expect that information
about whether a previous whistleblower, reporting non-anonymously, suffered retaliation will
influence reporting intentions for a subsequent fraudulent act. Specifically, we suspect that
whether retaliation has been suffered by a previous whistleblower will be used as a signal of
whether subsequent potential whistleblowers face an elevated prospect of retaliation. Retaliation
represents a potential cost of whistleblowing.Other things equal, increases in one's personal costs
should decrease ones likelihood of whistle blowing.
Hypotheses 1 examines whether follow-through outcome information about a previous
whistleblower is expected to differentially influence anonymous and non-anonymous reporting
Hypothesis 2 examines whether information about a previous transgressor is expected to
differentially influence anonymous and non-anonymous reporting intentions. (Steven E. Kaplan et
al.Advances in Accounting, incorporating Advances in International Accounting;28(2012)88-95.)


We obtain responses from participants placed in an experimental setting described by our
research instrument. Below we discuss the design, participants, task, independent and dependent
variables for the experiment. (Steven E. Kaplan et al.Advances in Accounting, incorporating Advances in
International Accounting;28(2012)88-95.)

Table 1
Demographic information:


Gender Female
Years of work experience Mean
Number of employees in company Mean
Have you discovered a person of greater authority
engaging in questionable or wrongful behavior?
Total (n=65)

The experiment utilizes a 222 repeated measures design with reporting intention as the
dependent measure.
Participants were on-line MBA students from a major university who were attending a meeting
on campus.7 Eighty-one participants completed the four crossed forms of the instrument, with
sixteen participants failing one or both of the manipulation checks (as discussed further in the
results section)
Participants were given an experimental instrument describing a hypothetical manufacturer of
consumable materials. They were then informed of the company's anonymous and non-
anonymous exporting channels. Following this was background information about the company
indicating that expenses were underreported.
Nature of the fraudulent act:
We used a fraudulent financial reporting act in our study. The specific fraudulent act involved
improper asset valuation, a frequent method of fraudulent financial reporting (Association of
Certified Fraud Examiners, 2006, 16), and one that is similar to the WorldCom fraud in that
items that should have been expensed were capitalized (Romero & Berenson, 2002; Verrocchio,
2003). (Steven E. Kaplan et al.Advances in Accounting, incorporating Advances in International

Independent variables:
The experiment includes three independent variables. Whistleblower retaliation and transgressor
repercussions are manipulated between participants and reporting channel is manipulated within
participants. We discuss each in turn.
Whistleblower retaliation:
Two levels of whistleblower retaliation are included in the experiment. Under the retaliation
present condition, the case included information indicating that a previous non-anonymous
whistleblower faced retaliation. (Steven E. Kaplan et al.Advances in Accounting, incorporating Advances
in International Accounting;28(2012)88-95.)

Transgressor repercussions:
Two levels of transgressor repercussions are included in the experiment. Under the repercussions
present condition, the case included information indicating that a previous transgressor faced
negative repercussions. (Steven E. Kaplan et al.Advances in Accounting, incorporating Advances in
International Accounting;28(2012)88-95.) .(Steven E. Kaplan et al.Advances in Accounting, incorporating
Advances in International Accounting;28(2012)88-95.)

Dependent measures:
The research instrument uses a 7 point scale (ranging from very unlikely to very likely) and
requires participants to respond to the anonymous ethics hotline and a supervisor above the
individual involved with the misstatement.
Manipulation check:
We included two manipulation check questions to determine whether participants attended to our
manipulations. First, respondents were asked whether the individual who reported the earlier
questionable act Continued to advance in the company or Resigned. Second, a question was
included on whether the individual who committed the earlier questionable act Was still
employed by the company or Resigned. (Steven E. Kaplan et al.Advances in Accounting,
incorporating Advances in International Accounting;28(2012)88-95.)

This study provides evidence on intentions to report fraud in settings where individuals may be
particularly hesitant to report fraud. Our results indicate that participants' non-anonymous
reporting intentions were significantly lower when a previous (non-anonymous) whistleblower
experienced retaliation compared to when a previous (non-anonymous) whistleblower did not
experience retaliation.

Article no.2
The absence of corporate social responsibility reporting in Bangladesh:
This paper aims to broaden the present corporate social responsibility (CSR) reporting literature
by extending its focus to the absence of CSR reporting within a developing country, an area
which, to date, is relatively under researched in comparison to the more widely studied presence
of CSR reporting within developed Western countries. In particular this paper concentrates upon
the lack of disclosure on three particular eco justice issues: child labor, equal opportunities and
poverty alleviation.The ambitious aim of eco-justice is to develop an ethic of social and
ecological justice where issues of race, class, gender,language, politics, and economics must be
worked out in terms of peoples relationship to their total environments human and non-
human.The next section of the paper provides the background for the study by outlining the
context of Bangladesh with specificregard to the importance of eco-justice issues. The paper then
proceeds with a theoretical discussion of CSR reporting, before considering the research
procedures adopted in the collection of data. (Ataur Rahman Belal. Critical Perspectives on
Accounting; 22(2011)654-667)

Table 1
Extent of CSR reporting by Bangladeshi companies:
Number Disclosure categories Total (N = 87)
1 SA standards 9(12)
2 Mission/vision statements 21(24)
3 Separate policy for social, ethical and environmental matters 6(8)
4 Board level responsibility/committee to deal with these issues 0(0)
5 Child labor 0(0)
6 Health and safety of employees 3(3)
7 Equal opportunities towards women/broader gender issues 0(0)
8 Industrial relations 16(18)
9 Human resource development 45(62)
10 Poverty alleviation 3(4)
11 Rural and agricultural development 4(5)
12 Corruption 1(1)
13 Other socio-economic issues 39(45)
14 Observation of various national ceremonies 4(5)
15 Value added statement 26(30)
16 Contribution to national exchequer 25(29)
17 Technological factors 27(31)
18 Attitude towards environmental matters 16(18)
19 Recognition of relevant stakeholders 70(80)
20 Welfare activities 8(9)

The Bangladeshi context:
Belal (2008) presents a study of the CSR disclosures made within the corporate annual reports
(related to the year1999/2000) of 87 Bangladeshi companies4 using a framework of 20
disclosure categories including the categories of povertyalleviation,equal opportunities and child
labour. The findings of this study highlight the extent of CSR reporting under different
categories and is summarised in Table 1.The above table indicates that while high numbers of
companies made disclosures under the categories of human resource development (62%) and
recognition of relevant stakeholders (80%), very few or no companies made disclosures under
the categories dealing with the eco-justice issues of child labour (0%), equal opportunity (0%)
and poverty alleviation (4%). We argue that there is, therefore, absence of disclosures on these
issues that have been identified as important both globally and specifically to Bangladesh. (Ataur
Rahman Belal. Critical Perspectives on Accounting; 22(2011)654-667)
Before we discuss these three important issues we first develop a general context of Bangladesh
General context:
Bangladesh is a post colonial country which gained independence from British rule in 1947
along with the rest of India and formed part of Pakistan. It was formerly known as East Pakistan.
It separated from the rest of Pakistan in 1971 through a bloody war. The liberation war of
Bangladesh was led by Sheikh Mujibur Rahman who was brutally murdered in 1975 during a
military coup. Various domestic companies in these sectors supply goods and services to many
large global companies around the world. In addition to that various multinational companies
operate in Bangladesh via their subsidiaries. Prominent multinationals include Glaxo, Reckitt
Benckeiser and British American Tobacco. (Ataur Rahman Belal. Critical Perspectives on
Accounting; 22(2011)654-667)
The democratic era together with an export led economy has enabled Bangladesh to achieve
remarkable economic growth in recent times; however, growth has not benefited everybody in
Bangladesh, as evidenced by the current levels of poverty.
Poverty alleviation;
Despite the economy of Bangladesh growing at an average rate of 6% per annum (Ahmed, 2006)
it remains one of the poorest countries in the world with a per capita income of only $440 a year
(WorldBank, 2005). In particular the mass of people in Bangladesh has yet to benefit from the
countrys economic growth. In absolute terms the poverty problems in Bangladesh are reported
to be worsening as evidenced by the increase in the number of people living below the poverty
line from 50 million in 1972 to 70 million in 2005 (TheDailyStar, 2006).The issue of poverty
alleviation is one that falls first on the national government and so it is not surprising to find that
it has been one of the most important items on the Bangladeshi national agenda for some time.
As well as government efforts there has been a significant amount of aid5 and poverty alleviation
work by NGOs, such as BRAC (Chowdhury and Bhuyia, 2004), which have not resolved this
problem. (Ataur Rahman Belal. Critical Perspectives on Accounting; 22(2011)654-667)

Equal opportunities:
Bangladesh has both an age and gender skew in its poverty. Poverty levels in Bangladesh are
high, but this is even more so for women who generally receive less household resources for
their food, education, health and clothing than men(Siddique, 1998, p. 1096). Discrimination
against women in the workplace is widespread in Bangladesh, particularly in the garments
companies (Newsware, 1999; Rashid,1998).In short, inequality is prevalent in Bangladeshi
society despite the unambiguous provision of equal opportunity in theconstitution of Bangladesh,
which clearly articulates the equality of men and women in all aspects of public life (Andaleeb
and Wolford, 2004, p. 52).
Child labour:
The use of child labour is an emotional issue of grave concern for Western policymakers and
consumers/buyers (see, for example, Kolk and Tulder, 2002; Ray, 2004). As such there have
been a number of international reform initiatives, primarily through the auspices of the
International Labour Organisation (ILO), the World Bank and UNICEF. The practices of
employers operating in Bangladesh is governed by a regulatory framework which includes, inter
alia,the Factories Act, 1965, Industrial Relations Ordinance, 1969, Employment of Labour
(Standing Orders) Act, 1965, Payment of Wages Act, 1936 and Workmen Compensation Act,
1923. At the same time it is important to examine motivations behind corporate responses (or
lack of responses) to these issues via CSR reporting. The next section considers theoretical
explanations about motivations for CSR reporting from the previous research. (Ataur Rahman
Belal. Critical Perspectives on Accounting; 22(2011)654-667)

Theoretical perspectives on CSR and its reporting:
The exploration of corporate motivations behind CSR reporting is an important research tradition
within the CSR reporting literature (Owen, 2004). Many researchers have used a legitimacy
perspective (Deegan, 2002; Deegan et al., 2002), which suggests that organisations require
legitimacy to be able to continue to operate, and that organisations use CSR reporting to
legitimise their relationship with the society and various stakeholders. In the accounting literature
Tinker (1980) explores the possibility of a move towards a political economy of accounting,
and hence away from the neo-classical economics of marginalism (p. 147), which would
require a consideration of the political and social role of accounting. Echoing and developing this
argument Cooper and Sherer (1984, p. 218) suggest that political economy of accounting should
recognize power and conflict in society, and consequently should focus on the effects of
accounting reports on the distribution of wealth and power in society. Within the CSR reporting
literature a number of studies explicitly comment upon reasons for its absence and a number
of factors are identified as important in determining such absences. In contrast a smaller number
of studies have addressed motivations for the presence/absence of CSR within annual reports
through seeking the views of managers. It is this method that has been adopted here from the
context of a developing country and this is considered in more detail in the following section.
(Ataur Rahman Belal. Critical Perspectives on Accounting; 22(2011)654-667)

Understanding the absence of CSR and its reporting in Bangladesh:
In this section we explore the absence of CSR reporting from the context of Bangladesh. In
particular, we describe thereasons for non-disclosures provided by our interviewees.

Lack of resources:
Belal and Owen (2007) argue that it is more likely that companies in developing countries will
be put under pressure(by the international market forces, international agencies and the head
office in the case of multinational subsidiaries operating in developing countries) to comply with
the requirements of international social accounting standards/codes. (Ataur Rahman Belal. Critical
Perspectives on Accounting; 22(2011)654-667).Therefore our interviewees suggest that CSR
reporting would require companies in developing countries to commit additional scarce
resources in terms of both time and money.

The profit imperative:
A number of interviewees indicated a concern that CSR and its reporting would be considered to
be a departure from shareholders wealth maximization objective. In line with the extreme
business case for CSR (Friedman, 1970) it was argued that a companys main objective should
be to make profits and there was little scope for diverting resources to non-essential activities.
We are not disclosing because we do not want to invite trouble. There are inherent dangers in it.
We dont want unsolicited invitations to participate in voluntary projects. In order to participate
in these projects you need financial commitment. It must have a positive impact on the profit.
(Interviewee 4) So for these interviewees a business case, in terms of positive impact on profit,
has to be made to consider CSR reporting appropriate. (Ataur Rahman Belal. Critical Perspectives
on Accounting; 22(2011)654-667)

Lack of legal requirements:
Like many other countries of the world CSR reporting is not a mandatory requirement in
Bangladesh. A number of interviewees expressed the view that the main reason for not
disclosing these significant issues is the absence of legal requirements. The prevailing
managerial attitude is: we will only comply if we are legally bound to do so. (Ataur Rahman Belal.
Critical Perspectives on Accounting; 22(2011)654-667)
The following quotations are illustrative of this attitude.
Lack of awareness/knowledge:
Given the fact that the phenomenon of CSR reporting is comparatively new to the companies in
developing countries many of them may not be familiar with its processes and requirements.
Most of the interviewees shared this view. (Ataur Rahman Belal. Critical Perspectives on
Accounting; 22(2011)654-667).They contended that some of the reasons for non-disclosure
might be attributed to lack of awareness and knowledge amongst corporate managers regarding
CSR reporting in general and disclosure on eco-justice issues in particular.
Poor performance and fear of bad publicity:
Two more factors, which conflict with the lack of awareness suggested above, for not disclosing
relate to the fact that companies were not actually undertaking enough social activities and that
additional disclosure could bring adverse publicity, particularly if the disclosures are not
positive. For example, defending the silence on the issue of equal opportunity one interviewee
says,We dont do that because it is not an issue for us. We dont have any written equal
opportunity policy. (Ataur Rahman Belal. Critical Perspectives on Accounting; 22(2011)654-667)
But in our job advert we do say that were an equal opportunity employer. We wouldnt disclose
it because weve got significantly low number of female employees. It has to be shown in a more
practical way. Otherwise itll give a distorted picture. (Interviewee 4).

Discussion and conclusions
According to our interviewees, the main reasons for non-disclosure include lack of resources, the
profit imperative, lack of legal requirements, lack of knowledge/awareness, poor performance
and fear of bad publicity. In this section of the paper we discuss the merit of these reasons
further. Firstly, we were told by our interviewees that their companies, based and operating
within a developing country, cannot afford the resources for CSR reporting. This immediately
gives an indication as to how the rules of the game fail to prioritise these issues in contrast to
those of profit, which we discuss in more detail later. Accounting reports may selectively fail to
communicate information where this is not consistent with business selfinterest. Thus non-
disclosure is seen as an effective means of intervention and confusion. (Martins et al.Hospitality
management accounting; 9th edition, pp125-133)

Article no.3
The Development of Accounting and Reporting in Ghana:

In this paper, we examine the economic, political, and legal systems as well as the institutional
factors that influence the accounting and disclosure practices in Ghana. The impact of
International Financial Reporting Standards (IFRS) on disclosure is also investigated, as Ghana
has recently completed full adoption. In this paper, we examine the socio-economic and political
environment,the institutional framework, accounting education, the role of local and
international accounting standards, and the existing enforcement mechanisms in order to provide
an understanding of the development of accounting and financial reporting in Ghana. A second
reason for this study is to provide information on the Ghanaian environment,which determines
the country's disclosure, financial, and reporting practices.(Oheneba Assenso-Okofo et al,The
International journal of Accounting;46(2011)459-480)

Ghana A brief profile:
The Republic of Ghana is located on the West Coast of Africa, between 4 and 12 latitude with
the Greenwich Meridian passing through it. It covers an area of 238,540 km2 (92,100 mile2),
which is comparable in size to the state of Oregon or about the size of United Kingdom.Formerly
known as the Gold Coast, because of the abundance of gold inWestAfrica,Ghana became the
first country in sub-Saharan Africa to gain independence on 6 March 1957. The economy of
Ghana is dependent on the export of natural resources, including gold,bauxite, industrial
diamond, manganese, timber, rubber, and cocoa production. However,the higher price of
imports, mainly crude oil1 machines, and accessories, has adversely impacted the Gross
Domestic Product (GDP). (Oheneba Assenso-Okofo et al,The International journal of
Accounting;46(2011)459-480). This, coupled with high inflation, has led to a reduction of

Table 1
Ghana's Population, GDP growth, and inflation rate since 1989.
Source: Ghana Statistical Service, Bank of Ghana, and International Monetary Fund.
YEAR Population
GDP (in
of US $)
YEAR Population
GDP (in
of US $)
1989 13,951 5249 30.46 1999 17,953 7710 13.79
1990 14,306 5886 35.90 2000 18,412 4983 40.54
1991 14,672 6599 10.26 2001 18,883 5312 21.29
1992 15,046 6413 13.33 2002 19,366 6157 15.17
1993 15,431 5966 27.66 2003 19,861 7624 23.56
1994 15,825 5440 34.18 2004 20,368 8877 11.78
1995 16,231 6461 70.82 2005 20,889 10,726 14.84
1996 16,644 6929 26.12 2006 21,423 12,906 10.92
1997 17,072 6888 22.14 2007 21,973 15,031 12.75
1998 17,506 7478 15.75 2008 22,532 16,124 18.13
There are three major sectors of the Ghanaian economy: agriculture, which is the backbone of
the economy, service, and industry. As Table 2 shows, there has not been a significant change in
terms of each sector's ratio to the GDP over the years.
Accounting regulations for financial reporting practices in Ghana:
There is limited information on accounting practices during the pre-colonial period in Ghana as
to when and how accounting practices in Ghana began (Wilks, 1989). The establishment of the
Institute of Chartered Accountants of Ghana in 1963 by Act 170 of Parliament is seen as the
foundation of formal accounting in Ghana. (Oheneba Assenso-Okofo et al,The International journal
of Accounting;46(2011)459-480)

Table 2
Percentage of the GDP attributed to the Ghanaian economy sectors.
Source: Computed based on the Bank of Ghana's annual reports.
Sectors/years 19861990 19911995 19962000 20012005 20062008
Agriculture 46% 42% 39.5% 38.35% 37.0%
Industry 14% 14% 26.5% 26.25% 25.7%
Services 40% 44% 34.0% 35.40% 37.3%

Companies' Code:
Accounting practices can be transferred from one country to another through colonialism,which
led to groupings such as the British-Influence group and the U.S.-influencegroup (Nobes &
Parker, 2002). Since Ghana was ruled by the United Kingdom (UK), the Companies' Code 1963
Act 179, which is the corporate legal framework of Ghana, has its roots in English Common
Law. It was written by D. Gower, who also wrote the UK Companies Act. In addition to the
adopted international codes and standards, Companies' Code gives guidelines for the governance
of all companies incorporated in Ghana. The Code has seen virtually no amendments since its
promulgation in 1963. (Oheneba Assenso-Okofo et al,The International journal of
Accounting;46(2011)459-480).This may encumber accounting reporting and disclosure
practices. A careful examination of the Companies' Code and the other reporting regulations
(e.g., SEC regulations) reveals that though they complement each other, the body of regulations
must be synchronized in order to eliminate the differences and make application simple.
Securities laws:
Securities laws standardize securities contracts and enforce an unrestricted access of disclosure
of information to investors. These laws spell out the obligations and related responsibilities and
sanctions to various parties in the corporate world (see Bushman & Piotroski, 2006; La Porta,
Lopez-de-Salines, Shleifer, & Vishny, 2003). In line with developments in other emerging
nations and the advice of the World Bank, Ghana instituted the Securities Industry Law 1993
(PNDCL 333) and established the Securities and Exchange Commission (SEC). This law
outlines how the SEC should function. It is the duty of the SEC to maintain surveillance over the
securities market, to ensure adequate protection and security to all investors, and to guarantee
fairness in the securities market. The World Bank in its report, however, suggested that the SEC
improve enforcement of disclosure quality, related party transaction regulations, insider trading,
disclosure of director remuneration, and ownership disclosure through staff training and
provision of resources (ROSC, 2005). (Oheneba Assenso-Okofo et al,The International journal of

Environmental factors affecting the development of accounting in Ghana:
It is often argued that accounting is a product of its environment, and, therefore, every set of
accounting practices is unique to its time and locality (Perera, 1989). The accounting practices of
a country are influenced by a variety of environmental factors, including but not limited to:
political, economic, educational systems, and international factors of the country (Choi &
Mueller, 1992; Mueller, 1968). (Oheneba Assenso-Okofo et al,The International journal of
Accounting;46(2011)459-480) .These factors are examined to determine the influence on
financial reporting practices in Ghana.
Political and economic influences:
Archambault and Archambault (2003), among others (see Choi&Mueller, 1992; Mueller, 1968;
Perera, 1989), find that social, political, and economic systems influence accounting reporting
and corporate disclosure practices of a country.This explains why there are variations in
corporate disclosures practices across countries.Consequently,these national systems are
examined vis--vis their effects on disclosure practices. (Martins et al.Hospitality management
accounting; 9th edition, pp147-163)

Political system:
It has been established that the political system influences the business environment, the
economy, and the accounting practices of a country (Archambault & Archambault, 2003;
Goodrich, 1986). McColm (1992) and Belkaoui (1983) reported that political freedom enhances
disclosure and argued that political freedom is the people's right. Most African countries have
experienced uncertainty as a result of unstable economic and political systems, which affected
important policies prior to 1990. (Oheneba Assenso-Okofo et al,The International journal of

Economic system:
A country's economic policies together with the common law legal systems greatly impact
business dealings (Doupnik & Salter, 1993). They form the framework that establishes how
companies relate to stakeholders (see Gernon & Meek, 2001; Mashayekhi & Mashayekh,
2008). The theory of accounting development links disclosure and economic environment
(Riahi-Belkaoui, 2002). There is a strong link between improved accounting and disclosure
practice on one hand and economic development on the other (Cooke & Wallace, 1990;
Nicholls & Ahmed, 1995).(Oheneba Assenso-Okofo et al,The International journal of

The capital market in Ghana:
The growth of the private sector hinges on capital markets (Pardy, 1992). If properly run,
thesemarkets can increase inventors' confidence and thereby help attract capital for the
development of a country's economy.
Multinational companies:
It has been argued that multinational companies (MNCs) provide more complete and transparent
accounting information than domestic companies (Cooke, 1989; Street & Gray, 2002). As
operators that raise capital in many different countries, MNCs are obliged to disclose useful
information to satisfy the demands of their international stakeholders in order to provide bonding
for resource providers and to obtain resources at lower cost. (Oheneba Assenso-Okofo et al,The
International journal of Accounting;46(2011)459-480)
The issue of taxation in relation to the accounting and disclosure practices of a country is worthy
of examination. Tax legislation influences accounting and disclosure as revenues and expenses
are recorded for tax purposes. Since the state uses taxation as a source of revenue from
companies, there is the possibility of political cost, which can influence corporate disclosure
(Bushman & Piotroski, 2006).


Due process of accounting standards:
Quality financial reporting depends to a large extent on how well standards are set and enforced
by a recognized qualified institution. The process and procedure of setting standards must be
adequate and acceptable by international standards. The Ghana National Accounting Standards
Board (GNASB) was established by the ICAG to develop, adopt, and publish accounting
standards and to promote their acceptance. (Oheneba Assenso-Okofo et al,The International journal
of Accounting;46(2011)459-480. The 16-member board is represented by theMinistry of
Finance, the SEC, the GSE, Audit Service, Institute of Taxation, the Academia, the Ghana Bar
Association, and other identifiable bodies. In 2001, the ICAG also established the Ghana
National Auditing Standards to guide practicing auditors in ensuring the adequacy and
compliance of financial statements and reporting disclosures with GNAS (ICAG, 2000).

Fig. 1. The accounting framework in Ghana

If the GNASB agrees that a subject meets its criteria for discussion, a group of experts
determines how and why the subject is important. Once a decision is made concerning the
subject to be examined, a steering committee is appointed and terms of reference are given.
Research is conducted on the subject, and all the facts and alternatives about the subject are
assembled by the steering committee. This research is published in the press and circulated for
relevant interested groups of the public for 60 days. (Oheneba Assenso-Okofo et al,The International
journal of Accounting;46(2011)459-480).During that time, the relevant bodies and members of
the public can comment and respond to it. There are claims that some governments and
companies influence or lobby their standard-setting bodies, that some special interest groups
influence the accounting standard-setting process (see Chung, 1999; Nashui, 1984; Sutton, 1984;
Zeff, 2005), and that there is even international lobbying on the IASB to sway standard settings
(Zeff, 2006). However, there is no evidence of government manipulating or companies lobbying
the process of standard setting in Ghana.
Enforcement and compliance with accounting standards:
The adequacy of the institutional and statutory framework, the level of development of the
accounting profession, and the roles played by standard-setters and enforcers are paramount to
the development of accounting practices and indeed the disclosure system (ROSC,2005). Fig. 1
illustrates the various institutions and regulatory frameworks that shape accounting practices and
disclosures in Ghana. The technical and logistical capacity to review financial statements and to
etect accounting/auditing violations is lacking even at the Registrar-General Department.
(Oheneba Assenso-Okofo et al,The International journal of Accounting;46(2011)459-480)

The accounting and reporting practices in Ghana are significantly influenced by not only
regulatory and institutional frameworks within the country but also legal, political,and economic
factors. Even though Ghana has adopted IFRS, it must be stressed that without an overhaul of the
institutions that implement accounting regulations and the revision of the companies' laws and
accounting policies, disclosure practices will not improve since regulation alone is not the
panacea. (Oheneba Assenso-Okofo et al,The International journal of Accounting;46(2011)459-480)
We recommend that urgent measures be taken to reform and build the capacities of the
institutions charged with the responsibility of regulating and monitoring Ghanaian accounting
and disclosure practices to ensure best practices.

Article no.5
The necessary characteristics of environmental auditors: a review of the
contribution of the financial auditing profession:
The business community faces many pressures from the green consumer, environmental groups,
employees and investors to accept its environmental accountabilities and to provide information
about its environmental performance. The 1990s have witnessed growth in, green consumerism,
green ethical investment trusts and general environmental concerns that have lead to specific
changes in business practice and its environment and it can be expected that these changes will
affect the accounting profession (Gray, 1990, p. 65). The Institute of Chartered Accountants in
England and Wales (ICAEW, 1992, p. 3) points out that where environmental factors will
impact on a companys policy and activities, and will impose costs on the company, or affect its
asset values or liabilities, actual or contingent, the financial consequences need to be accounted
for or reported in accordance with existing accounting requirements. The central proposal here
is that the financial audit profession can make a significant contribution to the area of
environmental auditing. This proposal leads to asking about the ability of financial auditors to
accept environmental challenges and participate in environmental auditing. (Robert Dixon et al.
Accounting Forum 28 (2004) 119138)

The financial audit profession and the area of environmental auditing
The relationship and overlap between financial and environmental audits has been widely
discussed (International Federation of Accountants Committee (IFAC), 1995, p. 11). A number
of studies have addressed the relevance of accountants and financial auditors in carrying out
environmental audits (Bebbington, Gray, Thomson, &Walterws, 1994; Black,1998; Canadian
Institute of Chartered Accountants (CICA), 1992 and 1997; Collison, 1996; Collison & Gray,
1997; Collison & Slomp, 2000; Collison et al., 1996; Federation des Experts Comptables
Europeans (FEE), 1993; Gray & Symon, 1992; Greeno, Hedestrom, & Diberto, 1989; Huizing &
Dekker, 1992; ICAEW, 1992, 2000; IFAC, 1995; Power, 1997).ICAEW (1992) addresses the
question of the competence of the financial auditor in the environmental area.
provisions, e.g. for site restoration costs;
contingent liabilities, e.g. arising from pending legal action;
asset values, e.g. where stocks of goods, or the fixed assets used in producing them, are subject
to environmental concern;
accounting for capital or revenue expenditure on cleaning up the production process or
to meet legal and other standards;
product redesign costs;
product viability/going concern considerations, e.g. where new regulations impose more
stringent criteria for emissions

The auditors responsibility towards environmental disclosures:
It is widely accepted that financial auditors can participate in environmental audits with other
specialists or in multidisciplinary teams (Collison & Gray, 1997; FEE, 1993; Gray & Symon,
1992; Hillary, 1993; Huizing & Dekker, 1992; Hunt, 1993; ICAEW, 1992, 2000; IFAC, 1995;
Maltby, 1995; Sanehi&Waire, 1991). IFAC (1995) and AICPA (1989) discuss the auditors
responsibility for using the work of an expert. (Robert Dixon et al. Accounting Forum 28 (2004)
119138). The application of International Auditing Atandards involves the auditor assuming
responsibility for the quality of the work performed by the expert. SAS57 points out that
management is responsible for accounting estimates included in the financial statement.

Fig. 1. Auditors responsibility for the work of others in auditing environmental disclosure.

Some factors which limit auditors involvement in environmental audits:
The evidence from the literature indicates that the auditing profession can contribute in other
areas of environmental disclosure. However, financial auditors participation in the area of
environmental auditing is limited. A number of studies point out factors which may limit the
auditors involvement in environmental audits (Bebbington, 1993, 1995; Booth,2001; Brinkmann
& Sims, 2001; Brown & Deegan, 1998; CICA, 1992; Collison & Gray,1997; Collison et al.It can
be suggested that these factors have two aspects. The first is related to auditors and the auditing
profession. The second is related to lack of the demand for environmental reporting from
Table 1
Auditors opinion concerning environmental issues in the audit of financial statements:
Unqualified opinion If the auditor thinks that the financial statements presented fairly. The
statements are not affected by a major uncertainty (such as,
environmental liabilities, law suits)In other words there are no impacts
from environmental issues on financial statements or the companys
Qualified opinion If the auditor concludes that environmental issues have a material effect
on the financial statements and the company has not properly
accounted for or disclosed this If the auditor is unable to obtain
sufficient evidence concerning items in the statements If financial
statements contain a material departure from GAAP
Adverse opinion If the auditor concludes that environmental issues have a material effect
on the financial statements and the company has not properly
accounted for or disclosed this If financial statements are not presented
fairly in conformity with GAAP and a qualified opinion is not
Disclaimer opinion If the auditor is precluded by the company from obtaining sufficient
competent evidential matter to evaluate whether environmental issues
could be material to the financial statements If there are significant
uncertainties (such as, contingent environmental liabilities) affecting
the financial statements as a whole and qualified opinion is therefore
not appropriate
(Robert Dixon et al. Accounting Forum 28 (2004) 119138)

The ethical and social aspects in accounting education:
The integrity of ethical and social aspects in accounting education is very important to the
qualification of accountants and auditors who should be able to deal with new professional
challenges, such as environmental matters. It can be argued that there is a crucial need to
encapsulate ethical and social dimensions in accounting education to raise the abilities of
financial auditors to be able to cope with environmental issues and the uncertainties of the
auditing profession. (Baker. Advanced financial accounting; 13th edition, pp315-333)

Research in accounting and auditing profession:
The ability of research to support the development of practice has attracted a variety of studies
(Bebbington et al., 1994; Day, 1995; Kaplan, 1984; Lee, 1989; Lehman, 1988; Lewis et al.,
1992; Power, 1991, 1997; Sterling, 1973). Academics do not offer solutions for problems, which
face practitioners in their work (Bebbington, 1997; Gray, 1996). While,Sterling (1973, pp. 44
52) argues that research is isolated from education and practice.Education and practice are
complementary in that educators teach accepted practices and practitioners practice what they are
taught. It difficult to assert that there is congruence between research and actual education and
professional practice. (Robert Dixon et al. Accounting Forum 28 (2004) 119138)
It can be argued that research should play an effective role in solving problems, which face
practitioners. Financial auditors knowledge about environmental matters can be increased by
research, which should be integrated with education and practice.
The experience, skills and training of financial auditors:
The financial auditors can play a role in environmental auditing but they possess only one
element of the required knowledge, skills and experience needed to carry out environmental
audits (FEE, 1993, p. 13While, Huizing and Dekker(1992, p. 444) argue that if there really is to
be a new environmental audit Profession,its personnel and skills are as yet indeterminate and
vague. The financial auditors need to learn more about the impact of environmental matters on
business and the implications of these matters on financial statements. Auditors also need new
experience, training and the opportunity to develop skills to deal with environmental challenges.
Auditors skills concerning some issues need to be improved, these issues such as; the use and
analysis of environmental information, the evaluation and estimation of uncertainty and those
which relate to environmental issues. (Robert Dixon et al. Accounting Forum 28 (2004) 119138)
Professional guidance for environmental matters;
The accounting professional bodies do not provide adequate and specific guidance for the
determination, estimation, measurement and disclosure of environmental issues. Ilintch,
Soderstrom, and Thomas (1998) point out that the accounting profession has been slow to take
on the role of measuring and controlling environmental matters. Welton et al. (1994argue that the
accounting profession needs to develop the ability to consider ethical issues. Bebbington et al.
(1994) concludes accountants and auditors will make little progress until there are rules. Brown
and Deegan (1998) point out that the professional accounting bodies in various countries should
dedicate both effort and financial resources towards the development of environmental
disclosure guidelines. Many empirical studies (Collison,1996; Collison & Gray, 1997; Collison
& Slomp, 2000; Collison et al., 1996; Huizing & Dekker, 1992; Maltby, 1995; Pong &
Whittington, 1994; Rezaee et al., 1995) provide strong evidence that the absence of professional
guidance limits auditors involvement in environmental audits. (Robert Dixon et al. Accounting
Forum 28 (2004) 119138)

Auditors views towards performing environmental audits:
Empirical studies of financial auditors views on environmental matters have produced mixed
evidence (CICA, 1994; Collison, 1996; Collison & Gray, 1997; Collison et al., 1996; Coopers &
Lybrand, 1990; FEE, 1993; Maltby, 1995; The Limperg Institute, 1992). The evidence suggests
some auditors perceive a risk of litigation because of legal responsibilities in the area of
environmental disclosure. In order to pull the analysis within the review of literature together
within the literature,a general framework of the necessary characteristics of environmental
auditors has been suggested as in Fig. 2.

It can be argued that environmental issues are having a variety of impacts on business. The speed
with which these changes have occurred has made it difficult for auditors to keep up to date.
Environmental issues can still be considered a relatively new challenge for auditors,whether
environmental responsibilities are voluntary or through regulation. (Robert Dixon et al. Accounting
Forum 28 (2004) 119138)

Article no.6
Deceptive Financial Reporting Detection: A Hierarchical Clustering
Approach Based on Linguistic Features:
Linguistic techniques have shown to be a promising way to uncover financial reports
manipulations. In this paper, a linguistic features-based hierarchical clustering approach is
proposed to detect deceptive financial reporting. The approach contains three steps: represents
the textual data of financial reports, selects the distance function and linkage, performs
hierarchical clustering and finds the deceptive reports. The high profile accounting scandals,such
as Enron, WorldCom, and Tyco have make investors lose several billions of dollars. Managerial
financial fraud is estimated in the billions of dollars annually in the United States [1].
Consequently, detecting whether financial reports statements are intentional misrepresentation is
of considerable interest to researchers and equity investors. The rest of this paper is organized as
follows. The next section describes prior related work, and then the proposed methodology is
introduced in Section 3. In Section 4 the experiment and evaluation results are explained and
discussed. Finally, Section 5 draws the conclusions. (Baohua Wang et al. Procedia Engineering
29 (2012) 3392 3396)

Related work:
Recent papers have provided interesting relations between linguistic cues and firm outcome. As
reviewed in [3], the approaches to measure the positive (optimistic) or negative (pessimistic)
tone in textual data are: use hand-collected list of words, simple word counts from psychosocial
dictionaries, and estimates produced by natural language processing classifiers. Although
confounded, some prior works [7,8], used carefully selected list of words to capture a particular
linguistic characteristic, this approach forces researches to identify the linguistic dimension of
interest. The second approach employs psychosocial dictionary to count words that reflect
particular characteristics [9-11]. Their textual data source included investor sentiment, financial
reports, business news and earning press release. Results showed word counting is a replicable
and transparent approach. The last approach is to apply text classifiers from computational
linguistics [12-14]. Their logistic regression analysis reveals nonverbal vocal emotion cues
classify individual as misreports or truth tellers with the accuracy 71%, while verbal cues from
linguistic analysis showed only marginal ability to detect misreports. Larcker et al. [3] estimated
classification models of deceptive discussions during quarterly earning conference calls, their
model was developed with word categories related to deception and with conservative statistical
tests. Though their performance is only with 50%-65%, their results suggested that linguistic
features are helpful to identify deceptive reporting. To our knowledge, there are no hierarchical
clustering approaches are introduced to detect deceptive reporting. (Baohua Wang et al. Procedia
Engineering 29 (2012) 3392 3396)

Deception-related words collection:
We construct our deception-related words collection based on the review and analysis provided
by [3].1343 words are selected in our collection altogether. For more details, please refer to the
appendix of [3].

Textual data representation:
Publicly financed firms in the United States are required to submit financial reports to the U.S.
Securities and Exchange Commission (SEC) annually in the 10-k form. Besides key numeric
financial indicators, the 10-k contains a managerial discussion regarding the financial condition,
results of operations, and future outlook of the company. Given one firms 10-k reports:
(r1,ri,rn), where n is total number of reports, suppose that the deception-related words
collection is w1,,wj,,wm, where wj represents one word or phrase that is deception related,
the textual data of ri can be represented as Xi=di1,.,dij,dim, where dij is defined
as: ij ij i d = f / t , where fij represents the word frequency of wj in the textual data of ri, ti is the
total words number of the textual data in ri. (Baohua Wang et al. Procedia Engineering 29 (2012)
3392 3396)
Hierarchical clustering:
Hierarchical clustering form groups or clusters of similar objects based on similarities among
their measure features by building a hierarchy of clusters. Such method, which is useful for to
find similar groups of cases when no training data is available, is used in this study since there
are always no large financial reports data labeled for training. Some commonly used linkage
methods for hierarchical clustering are: single linkage, complete linkage, average linkage,
centroid linkage and ward's linkage. (Baohua Wang et al. Procedia Engineering 29 (2012) 3392
3396).On the other hand, the cophenetic correlation coefficient is a measure of how faithfully a
dendrogram preserves the pair wise distances between the original ungrouped data. The distance
function and the linkage method which gain the highest coefficient will be selected for one
companys clustering in our approach.
Algorithm design:
From the above analysis, the algorithm is designed in details as follows.
Step 1: For one companys 10-k reports ri, counts the words listed in deception-related
collection, represents the textual data of ri with the linguistic feature vector Xi based on the
method mentioned above.
Step 2: Select the distance function and the linkage which gain the highest cophenetic correlation
Coefficient for clustering.
Step 3: Select k=2,3 as the number of clusters, perform hierarchical clustering on the financial
reports respectively, the reports which do not comply with the general feature can be regard as
deceptive ones. (Baohua Wang et al. Procedia Engineering 29 (2012) 3392 3396)
Data sets:
Five companies' 10-k reports are collected from SEC website ( Three
companies which caused famous scandals are Enron (Enron CORPORATION), WorldCom
(WorldCom CORPORATION), and Xerox (Xerox CORPORATION). They were found reports
manipulation during 1997-2000, 1999-2001 and 1997-2001 respectively. Another two companies
which often won the Best Investor Relationship Award and have no reports manipulation been
found yet are: GE (GENERAL ELECTRIC COMPANY) and McDonald's (McDonald's
CORPORATION). (Martins et al.Hospitality management accounting; 9th edition, pp189-200)

Clustering Results:
Applying our algorithm on the 10-k reports of the five companies, the clustering results are
shown in Table 1 and the precision and recall in brackets. The 10-k reports of the underlined year
can be viewed as fraud one because they do not comply with the general feature of data. It
should be noted that k=2, 3 are not selected on Xerox, k=3 are not selected on GE and
McDonalds because there exists one objects silhouette coefficient negative after clustering.
Through the table, we can find that four precisions and three recalls are 100%, in contrast, no
deceptive reports can be found on GE and McDonalds. The results indicate that our approach
can effectively detect the deceptive reporting. (Baohua Wang et al. Procedia Engineering 29
(2012) 3392 3396)

Recent works have provided interesting findings between linguistic cues and financial
manipulations. In this paper, a linguistic features-based hierarchical clustering approach is
proposed to detect deceptive financial reporting. The approach represents the textual data of
financial reports as linguistic feature vectors, then performs hierarchical clustering and the
outliers can be viewed as deceptive reports. The proposed approach has been evaluated with
annual reports of five companies. Experimental results show that the proposed method can
effectively detect deceptive reporting. (Baohua Wang et al. Procedia Engineering 29 (2012) 3392
3396). It indicates that our findings have implications in assessing the likelihood of deceptive
financial reporting.
Table 1 Clustering Results:
Number of clusters Results
Enron clusters (k=2) {1993,1994,1995,1996,1997,1999,2000}{1998}(Precision: 100%, recall: 25%)
Enron clusters (k=3) {1993,1994,1995,1996,1997}{1998}{1999,2000}(Precision: 100%, recall: 75%)
WorldCom clusters
{1994,1995,1996,1997,2000,2001}{1998,1999}(Precision: 50%, recall: 33%)
WorldCom clusters
{1994,1995,1996,1997}{1998,1999}{2000,2001}(Precision: 75%, recall: 100%)
Xerox clusters (k=5) {1994,1995,1996}{1997,1998}{1999,2000}{2001}{2002,,2010}(Precision:100%,recall: 100%)
Xerox clusters (k=6) {1994,1995,1996}{1997}{1998}{1999,2000}{2001}{2002,,2010}(Precision:100%,recall:100%)
GE clusters (k=2) {1994,1995,1996,1997,1998,1999,2000,2001}{2002,2003,2004,2005,2006,2007,2008,2009,2010}
McDonalds clusters

Article no.7
Computer Fraud & Security Bulletin:
Major Fraud at Irish Sugar Corporation:
On 24th February 1980 the peaceful business community in Dublin was shattered by a report in
the Sunday Press newspaper that a massive fraud, rumored to be as high as E6,000,000, had been
discovered in Erin Foods, a subsidiary of the Irish Sugar Corporation. Turnover during the last
accounting period to September 1979 was up by 16 per cent to El00,000,000.Besides obvious
interests in sugar, the Corporation has investments in quarrying, heavy goods manufacture, and
dry foods packaging through Erin Foods. Erin Foods, in which the fraud is alleged to have
occurred, has a turnover of about E20,000,000 and distributes dry foods, such as soups and
vegetables, packaged at its factory in Thurle, through about 60 outlets organized in three
divisions: Ireland, united Kingdom and the rest of the world. (MICHAEL COMER et al. Computer
Fraud & Security Bulletin;vol 2,number 6 April,1940)

Expansion plans:
Most of Erin Foods accounts and stock control programs are run on an ICL 1903.Export
documents missing. The financial fortune of the Corporation appears to have been somewhat
mixed: while total profits fell from E3 250 000 to E221 000, Erin Foods was spending heavily to
develop and expand markets in the Far East. Overall profits had been affected by the high
interest rates on borrowings for new plant and equipment and by Erin Foods' expansion efforts.
Boland's absence caused a few problems for a leading Irish management association to whom he
was due to lecture on the finer points of credit control. His unexpected absence spoiled the
conference, and it is rumored that the Fraud Squad appeared at the venue, on the chance that
Boland might turn up! (MICHAEL COMER et al. Computer Fraud & Security Bulletin;vol
2,number 6 April,1940)

Export documents missing:
Also on the missing list are said to be crucial export documents relating to Erin Foods' Far East
business. The auditors for Erin Foods are the highly respected firm of Coopers and Lybrand. For
some reason the accounts for the financial year ending 30 September 1979 were late in being
produced and those that were drafted have been amended with words of caution. A phrase
relating to progress in the Far Eastern market has been deleted. The problems came to light after
Boland left work, apparently for a holiday in Tenerife, and Mahon left with his family for a
holiday in the USA. (MICHAEL COMER et al. Computer Fraud & Security Bulletin;vol 2,number
6 April,1940)

Credit limit exceeded:
Soon afterwards the Controller of Erin Foods noticed that an agent in Hong Kong had exceeded
his credit limits and sent a routine memo to the credit control department (to Boland's stand-
in)asking for clarification. The agent argued that there were no payments outstanding on his 90
day account. Soon after senior executives from Erin Foods visited Hong Kong and returned to
Dublin ashen faced. The order would be processed through Erin's head office and then passed to
the factory at Thurle, but increased to 10 lots at El0 000. The goods would be shipped and
charged in full (ie El00 000) to the Agent's account at Erin Foods. In the 90 day audit cycle, the
agent would pay E80 000 and the balance would be concealed on the credit control reports.
Apparently stock losses at Thurle were insignificant. (MICHAEL COMER et al. Computer Fraud &
Security Bulletin;vol 2,number 6 April,1940)

Educated guesses:
Although we cannot comment on the exact facts of the Erin Foods loss similar symptoms have
been seen in other cases and some inferences can be drawn:
(1) Since there were only small stock losses at the manufacturing plant any excess shipments
(ie additions to genuine orders)must have been credited to the stock accounts. Thus the
manipulation appears to be positive; ie additional entries were made, rather than
document destruction or entry omission, the more common method of sales suppression.
(2) Since the agent did not, apparently, complain about being overcharged, it is fair to
assume that the cost of the additional items (although charged to his account at the Erin
Foods end) were not included on his monthly statement. If the agent had been charged for
goods he had not received, it is likely he would have complained much earlier, unless, of
course, the scheme had only recently started.
(3)The full amount of the invoices (including the additional items) was probably debited to
the Agents account at Erin Foods. This would be necessary to tie up with then inventory
credit at the factory. The proper charge to the account would explain why the Controller
noticed that the credit limit had been exceeded.
(4) The differences between the account for the Agent in Erin Foods' books and the
statements received by him could be explained as a "computer error" and could be confused
further if the orders were always in round amounts (that is, always for E80 000 or similar).
(5) Despite the fact that the Fraud Squad have seized computer tapes, it is likely that the
company's ICL 1903 played only a small part in the loss, unless a data processing man (so far
Undiscovered) was involved. There is no evidence to suggest that Boland or Mahon had detailed
knowledge of computing or access to the machine. They would, most probably, have been able
to adjust or falsify input. In this case, the computer may be of more use unraveling the details of
the case than in perpetrating the alleged fraud. (Baker. Advanced financial accounting; 13th edition,

Possible modus operandi:
Based on the known facts of the Erin Foods case and best guesses to unanswered questions it
would be possible to speculate on the following fraud possibility; we emphasize they are only
(1)Agent A orders goods valued at E80 000 for delivery to Port A in country A on c.i.f.
(2)On receipt in the head office, a second and separate order is entered for E20 000 worth of
goods for agent A delivered to Port B in Country A.
(3)The two orders are sent to the factory for packing. They are dispatched through the same
carrier and shipping line (but on separate Bills of Lading) to Country A.
(4)Copies of the Bill of Lading for the E80 000 shipments are sent to the legitimate Agent in
Country A and he makes a formal customs declaration and pays duty in respect of them.
(5)An accomplice in Country A receives the second Bill of Lading for the "additional
goods", declares them on a separate customs entry, pays duty and collects them from the
docks. They are then sold for cash or disposed of in country A or possibly entered for
transshipment to Country B. (6)The invoice for the original order (E80 000) is sent to the
agent, posted to his account and on his 90 day statement.
(7)The invoice for the additional order is posted to the agent's account in the Head Office
records, but is not sent to him. It is omitted from his statement either at the source processing
stage or by retyping the statement prior to being sent to him. Thus the Agent does not know
of the additional debits.
(8)The agent pays the genuine order and invoice after 90 days; the additional invoice remains
outstanding. Depending on the exact credit control system, the ageing records of the debt
could be falsified, the debt could be held in suspense (on the fictitious grounds that the goods
have been lost or damaged in transit) or lapped into another accountThese points are of
course speculative and not necessarily correct in the Erin Foods case. In Erin Foods, there
seem to be two possibilities, if losses are in fact fraudulent:
1. Suppression of sales;
2 .conversion of incoming cheques.
Of the possible alternatives, the suppression of sales appears the more likely. Enquiries with the
Agent would resolve this point -did he make payments not recorded or was he charged for goods
not received? (MICHAEL COMER et al. Computer Fraud & Security Bulletin;vol 2,number 6

Million Dollars worth of Free Samples:
Matthew De Filippo, a 34 year old computer operations manager, has been released on
$10 000 bail pending trial on charges of defrauding his employers - pharmaceutical
manufacturers E R Squibb and Sons - of approximately one million dollars.De Filippo is due to
stand trial on 29 April 1980. (Baker. Advanced financial accounting; 13th edition, pp365-373)

Article no.8
International Financial Reporting Standards and the quality of financial statement
This study focuses on the adoption of the International Financial Reporting Standards (IFRSs) in
the UK and concentrates in the switch from the UK GAAP to IFRSs. The study seeks to
determine whether IFRS adoption leads to higher quality accounting numbers.The study focuses
on firms listed on the London Stock Exchange and determines whether the adoption of IFRSs
has improved accounting quality. The implementation of IFRSs is compulsory for listed firms
that belong to member states of the European Union (1606/2002/EC), the effective date being 1
January 2005.2. (George Iatridis. International Review of Financial Analysis 19 (2010) 193204)
Contribution of IFRSs:
IFRSs are issued by the International Accounting Standards Board (IASB), formerly known as
International Accounting Standards Committee (IASC). The main objective of the IASB is to
develop, in the public interest, a single set of high quality, understandable and enforceable global
accounting standards that require high quality,transparent and comparable information in
financial statements and other financial reporting to help participants in the world's capital
markets and other users make economic decisions (Epstein & Mirza,2002, p. 11).
Managerial behaviour:
Managerial behaviour is associated with contractual arrangements,such as compensation
schemes and debt covenants as well as asset pricing, information asymmetry, agency and
political costs (Scott, 1997; Han & Wang, 1998; Francis, 2001; Lambert, 2001). The preparation
of financial statements often requires an exercise of judgement (Jensen & Meckling, 1976; Fama,
1980). This in association with the flexibility in financial reporting, which gives firms some
leeway in the implementation of accounting regulation, may give rise to opportunistic situations.
Earnings management:
The higher disclosure requirements and financial reporting quality that follow from IFRS
adoption would tend to lower the potential for earnings management and managerial discretion
(Leuz & Verrecchia,2000; Ashbaugh, 2001; Ashbaugh & Pincus, 2001; Leuz, 2003). Less
subjectivity would lead to fewer opportunities to influence reportedearnings and bonuses and/or
mislead investors.
H1. IFRS adoption is likely to reduce the scope for earnings management.
The first earnings management test relates to the examination of
a) the volatility of the change in net profit scaled by total assets, NP, and
b) the volatility of the change in net profit, NP, to the change in operating cash flows, CF.
Less volatile net profit, as in (a), and less volatile net profit compared to operating cash flows, as
in (b), would tend to provide evidence of earnings management.The second earnings
management test is about the examination of the association between discretionary accruals and
cash flows. This is carried out by firstly studying the Pearson correlation between discretionary
accruals and cash flows separately in the pre-official adoption period and the official adoption
period. A negative correlation would tend to be indicative of earnings management as firms tend
to influence and increase accruals when cash flows appear to be lower (Land & Lang, 2002;
Myers & Skinner, 2002). Secondly, the study uses an Ordinary Least Square (OLS) regression to
determine the association between discretionary accruals and cash flows as well as profitability,
leverage and size. The regression model that is used is as follows (see Tendeloo & Vanstraelen,

DACi;t = a0 + a1FRSi;t + a2FRSOCFi;t + a3FRSLNMVi;t
+ a4FRSOPMi;t + a5FRSTLSFUi;t + ei;t
DACi,t is the discretionary accruals that are estimated using the cross-sectional Jones model
(Jones, 1991). The study uses the residuals of the following regression model as discretionary
accruals (see also DeFond & Subramanyam, 1998; Bartov, Gul & Tsui, 2001; Kothari, Leone &
Wasley, 2004; Garza-Gomez et al., 2006).
ACi;t = a0 1 = Ai;t1 a1REVi;t + a2PPEi;t + ei;t
(George Iatridis. International Review of Financial Analysis 19 (2010) 193204)
Value relevance:
Auer (1996) suggests that earnings announcements tend to display significantly higher value
relevance under IASs than under the Swiss GAAP. Similar findings are reported by Kinnunen,
Niskanen and Kasanen (2000), who indicate that IAS-based earnings tend to carry higher
information content than those under the Finnish GAAP.
H2. Accounting measures reported under IFRSs are likely to exhibit
higher value relevance.The first test that is used to test the above hypothesis is based on the
examination of the explanatory power R2 and the coefficients obtained from the OLS regression
of share price on book value per share and net profit per share. The model used in the study is as
follows (see Harris, Lang & Moller, 1994; Lang et al., 2003; Barth et al., 2005; Lang et al., 2005;
Hung & Subramanyam, 2007):
Datasets and empirical methods:
The analysis focuses on firms that adopted IFRSs. The effective date for the adoption of IFRSs
for listed firms that belong to member states of the European Union is 1 January 2005. The
empirical analysis concentrates on the official adoption period of IFRSs, i.e. 2005, and the
pre-official adoption period, i.e. 2004. The sample consists of 241 UK firms. All sample firms
adopted IFRSs in the official adoption IFRSs, all sample firms had been using the UK
GAAP.and financial data were collected from DataStream. The tests that have been performed to
check the OLS assumptions are the White test and the Autoregressive Conditional
Heteroscedasticity (ARCH) test for heteroscedasticity; the DurbinWatson test and the Breusch
Godfrey test for autocorrelation; the JarqueBera test for the departure from normality of
residuals; and the correlation coefficients among the test variables for multicollinearity. (George
Iatridis. International Review of Financial Analysis 19 (2010) 193204)
Research limitations:
The accounting measures that are employed in the study are intended to explain the managerial
decisions of firms. However, the behaviour and the actual decision-making of managers may not
always be observable. In such cases, the theoretical predictions might not capture sufficiently the
relation between firms' accounting policy choice and the related accounting measures, or the
potential for opportunistic behaviour. Another major issue is the extent to which stock returns
reflect firms' financial performance and how reliably may be used by investors for financial
decision-making. This depends on how efficient the stock market is and how quickly investors
realise the accuracy and weight of reported accounting information, as they have their own
expectations and set of values (see Dye, 1998; Verrecchia, 2001). Future research should focus,
therefore, on the investigation of the stock market response to IFRS implementation. Another
limitation is that the findings of the study relate to the case of the UK, where the UK GAAP is
shareholder-oriented and strong investor protection mechanisms are in place, and therefore
cannot be generalised to stakeholder-oriented settings (e.g. Germany) or settings with weak
investor protection laws (see Hung & Subramanyam, 2007).

In the light of the compulsory implementation of IFRSs, as of 1 January 2005, this study
investigates the impact of IFRS adoption on UK firms' financial numbers. The study explores
major issues, such as the earnings management potential and the value relevance of IFRSbased
accounting numbers. The study indicates that the two financial systems display significant
differences and therefore affect firms in a different manner. The study also formulates a basis for
studying firms' behaviour with regard to other accounting and national settings, for example,
common-law and code-law accounting regimes, separately and jointly. The findings of such
studies would shed light on the manner in which different accounting regimes adjust to IFRSs.
For example, countries that are closer to IFRSs would be expected to experience a smoother
IFRS transition. (George Iatridis. International Review of Financial Analysis 19 (2010) 193204)
A central area of interest for the international accounting literature will be the transition of the
US to IFRSs. This study can be the basis for studying the transition to IFRSs from the US GAAP
as well as from other national GAAPs. The investigation of the IFRS effects however should
require the consideration of the respective national institutional background and differences
compared to IFRSs. The study would also be useful as a basis for examining the impact of
adopting the IFRS for Small and Medium-sized Entities or for assessing the impact of IFRS 9
Financial Instruments. Future research should also concentrate in a per case detailed and
distinctive examination of the reported differences between IFRSs and the UK GAAP and report
how the underlying differences affect firm performance and future prospects. (Garrison et al.2008,
Managerial accounting; 12th edition, pp147-159)

Article no.9
How does financial reporting quality relate to investment efficiency?
Prior evidence that higher-quality financial reporting improves capital investment efficiency
leaves unaddressed whether it reduces over- or under-investment. This study provides evidence
of both in documenting a conditional negative (positive) association between financial reporting
quality and investment for firms operating in settings more prone to over-investment (under-
investment). Firms with higher financial reporting quality also are found to deviate less from
predicted investment levels and show less sensitivity to macro-economic conditions. These
results suggest that one mechanism linking reporting quality and investment efficiency is a
reduction of frictions such as moral hazard and adverse selection that hamper efficient
investment. the economy and the industry levels. Two key constructs in this analysis are
investment efficiency and financial reporting quality. We conceptually define a firm as investing
efficiently if it undertakes projects with positive net present value (NPV) under the scenario of
no market frictions such as adverse selection or agency costs. Thus, under-investment includes
passing up investment opportunities that would have positive NPV in the absence of adverse
selection. Correspondingly, over-investment is defined as investing in projects with negative
NPV. (Gary C. Biddle et al, Journal of Accounting and Economics 48 (2009) 112131)
Determinants of capital investment efficiency:
In the neo-classical frame work, them marginal Q ratio is the sole driver of capital investment
policy(e.g., Yoshikawa, 1980; Hayashi,1982; Abel, 1983). The discussion above suggests that
information asymmetries between firms and suppliers of capital can reduce capital investment
efficiency by giving rise to frictions such as moral hazard and adverse selection that can each
lead to produce over- and under-investment. In the next section, we discuss how financial
reporting quality can reduce these information asymmetries and can be associated with
investment efficiency. (Gary C. Biddle et al, Journal of Accounting and Economics 48 (2009) 112
Research design;
We test these hypotheses in three ways. First, we examine the relation between financial
reporting quality and the level of capital investment conditional on whether the firm is more
likely to over- or under-invest. We use firm-specific characteristics (identified by the prior
literature) to classify firms with higher likelihood of over- or under-investing (in Section 5, we
also consider measures of over- and under-investment based on economy-wide and industry-
specific partitions). Second, we directly model the expected level of firm-specific capital
investment based on the firms investment opportunities, and test the association between
financial reporting quality and deviations from this expected level (our second proxy for over-
and under-investment). (Gary C. Biddle et al, Journal of Accounting and Economics 48 (2009)

Sample and descriptive statistics:
Our main sample consists of 34,791 firm-year observations from 1993 to 2005. Westartin1993
because the FOG measure is only available post-1993(andthe G-Score post-1991).We collect
financial reporting data from Compus tat,price and return data from CRSP,analyst data from
IBES,ownership fromThomsonFinancial,and governance data from Gompers et al.(2003).
However, as shown below, the relation between financial quality and investment is conditional
on the firm propensity to over- or under-invest. (Gary C. Biddle et al, Journal of Accounting and
Economics 48 (2009) 112131)

Fig. 1. Investment residual a cross financial reporting quality groups.Panal Aunder-investment
and Panel Bover-investment.

Conditional relation between financial reporting quality and investment:
First, we test whether higher financial reporting quality is negatively (positively) associated with
investment when firms are more likely to over-invest (under-invest).Specifically we estimate the
following model.
Investmenti;t1 a b1 FRQi;t b2 FRQi;t _ OverIi;t1 b3 OverIi;t1 b4 Govi;t b5
Govi;t _ OverIi;t1 Rgj Controlj;i;t ei;t1. (Gary C. Biddle et al, Journal of Accounting and
Economics 48 (2009) 112131)
Robustness checks:
As robustness checks,we conduct three additional sets of tests. First,we divide our overall
measure of investment between capital expenditure(Capex) andnon-capital expenditure
investment(Non-Capex). Second,we examine two alternative partitioning variables based on
aggregate and industry data. To avoid repetition,we use the aggregated reporting quality
factor(FRQ Index) as the proxy for financial reporting quality in the set estsand discuss there
sults for the individual proxies in the text. (Gary C. Biddle et al, Journal of Accounting and
Economics 48 (2009) 112131)
Capex versus non-Capex investment:
When we calculate our measure of investment, we consider both capital expenditures and non-
capital expenditures. This approach follows the work by Richardson (2006).As a robustness
check, we decompose the overall investment into two components. We compute Capex as the
capital expenditures,scaled by lagged property,plant,and equipment.We compute Non-Capex as
the sum of R&D expenditures and acquisitions, scaled by lagged total assets(results are
unchanged if w einclude advertising expensesin Non-Capex). Were-estimate our main model
using these two measures. (Gary C. Biddle et al, Journal of Accounting and Economics 48 (2009)
Prior studies suggest that higher financial reporting quality can improve investment efficiency by
reducing information asymmetries that give rise to frictions such as moral hazard and adverse
selection. We extend this research by documenting the channels by which financial reporting
quality relates to investment efficiency. Specifically, we test the hypotheses that higher financial
reporting quality can be associated with either lower over- or under-investment.Our results are
consistent with these hypotheses when tested in several ways.While our findings suggest that
financial reporting quality is associated with lower over- and under-investment, an opportunity
exists to extend our findings in several ways. (Gary C. Biddle et al, Journal of Accounting and
Economics 48 (2009) 112131)

Article no.10
The regulatory framework for financial reporting and auditing in the United
Kingdom: the present position and impending changes:
This paper provides an overview of the current regulatory framework for financial reporting and
auditing in the United Kingdom. The framework remained stable for 10 years following
significant reforms in 19901991. A further process of change is now taking place. These
changes arise from three sources: refinements in the UKs regulatory framework, the European
Commissions drive for a single capital market, and political interest in accounting regulation
following the Enron collapse. The present position is explained and the future implications of
recent and impending changes are considered. (Stella Fearnley et al, The International Journal of
Accounting 38 (2003) 215233)
UK domestic law and regulation:
Three changes to domestic law and regulation have already taken place. First, the London Stock
Exchange, which was self-regulatory, is no longer the Listing Authority in the United Kingdom.
This responsibility was taken over by UK Listing Authority (UKLA), a body which is part of the
Financial Services Authority (FSA), a government agency. Second, a new private sector
regulator, the Accountancy Foundation, has recently been set up by the UK accountancy
professional bodies to provide independent oversight of their regulatory activities, auditing and
ethical standards, and conduct disciplinary investigations. Third, new regulations were issued in
July 2002 with respect to directors remuneration disclosures (Statutory Instrument, 2002).
European Commission:
Significant changes are also being introduced by the European Commission as part of the
initiative to strengthen the capital markets in the European Union by creating common standards
of listing and reporting for all member states. A regulation was recently passed by the European
Union Council of Ministers that all listed companies should adopt International Accounting
Standards (IAS)4 for their group accounts by 2005 (IASB, 2002). It is also hoped that the audit of these
groups should follow International Standards of Auditing (ISAs) from the same date5 (Co-ordinating
Group on Auditing and Accounting Issues [CGAA], 2002). A further development is the planned
introduction of a common form of prospectus and annual registration document for member states, to be
accepted by all capital markets throughout the Commission (FSA, 2002b).
The Enron collapse:
Following the collapse of Enron and the turbulence in the UK markets that followed, the
Chancellor of the Exchequer7 ordered a review of financial regulation in the United Kingdom,
covering auditor independence, corporate governance, regulation of the accountancy profession,
financial reporting and auditing standards,company law reform and accountability of audit firms.
(Stella Fearnley et al, The International Journal of Accounting 38 (2003) 215233)
UK domestic companies:
The Department of Trade and Industry (DTI) is responsible for overall policy with respect to
company law, including financial reporting and auditing in the United Kingdom. As well as
UK.domestic provisions, European Union (EU) Directives are introduced through company
There are approximately 1.4 million active registered domestic companies, of which 2175
are listed on the London Stock Exchange.10(Stella Fearnley et al, The International Journal of
Accounting 38 (2003) 215233)

UK domestic listed companies:
Companies whose shares or other securities are listed on the London Stock Exchange are
required to comply with the regulations issued by the UKLA (FSA, 2000).16 On 1 May 2000,
the role of the London Stock Exchange as the listing authority for the United Kingdom was
transferred to the FSA, a company limited by guarantee, accountable to the UK Government
Treasury,17 and funded by regulatory fees.Checks are performed on a sample of regular filings,
which mainly focus on compliance with the Listing Rules, as the UKLA is not primarily responsible for
compliance with company law and accounting standards. An overview check is carried out on this
information. Where the UKLAs overview checks identify deficiencies in accounting, or deficiencies are
drawn to its attention, the UKLA refers the company accounts to the FRRP.Pre-clearance advice may be
given by the FSA on compliance with the Listing Rules, but not on compliance with company law and
accounting standards. Regulatory pre-clearance on company law and accounting standards is currently not
available in the United Kingdom.
When a breach of the Listing Rules is identified, the first priority of the UKLA is to correct the breach.
(Stella Fearnley et al, The International Journal of Accounting 38 (2003) 215233)
Overseas registrants25:
In all there are 708 overseas companies with a primary listing on the London Stock Exchange.26
Of these, 500 are specialist debt issuers, and 160 have a primary listing for equity.The debt
issuers may have a primary listing for their equity on another market. The market for Eurobonds
is mainly in London or Luxembourg, and this may explain the relatively high number of
specialist debt issuers. There are 370 overseas companies with a secondary listing,of which 213
have an equity listing. Accounting information may be provided by registrants under UK GAAP,
US GAAP, or IAS without reconciliation, but the accounts must comply with domestic law in
the registrants country of origin. Companies resident in the EU may file under their own
domestic GAAP. UKLA has discretion to accept information prepared under other accounting
regimes and is more inclined to do this where the security is specialized debt rather than equity.
(Stella Fearnley et al, The International Journal of Accounting 38 (2003) 215233)
The regime for audit regulation and standard setting:
Until 1991, holders of a legally recognized accounting qualification and a practicing certificate
issued by a recognized professional body were entitled to carry out audits.28 This situation was
changed by the EU 8th Directive, which was incorporated into UK Company Law in the 1989
Companies Act. One objective of this directive was to harmonize audit qualifications throughout
the EU in order to achieve mutual recognition in all member states. Because of the loss of
confidence in financial reporting and auditing which had arisen in the UK in the 1980s, the DTI
took the opportunity to introduce a monitoring procedure for auditors, which went beyond the
requirements of the Directive. (Stella Fearnley et al, The International Journal of Accounting 38
(2003) 215233)
Market structure:
For the year-ended 31 December 2000, there were 8626 firms of auditors registered with
ICAEW, ICAS, and ICAI (ICAEW, 2001),30 88% of which have four partners or less. One
hundred and two firms audit listed companies. Seventy-six percent of listed company audits are
carried out by 16 firms with more than 51 partners. The 100 largest listed companies in the
United Kingdom (generally referred to as the FTSE 100, being the top companies as listed by the
Financial Times) are audited by Big Five (now Big Four) firms.31 ICAEW regulates all the
major audit firms in the United Kingdom. (Martins et al.Hospitality management accounting; 9th edition,

Securities regulation:
The UKLA, a division of the FSA, is now the competent authority in the United Kingdom for
securities regulation. The UKLA is responsible for the contents and the implementation of the
UK Listing Rules and is accountable to the UK Treasury. However, responsibility for oversight
of financial reporting and auditing rests with a different government department, the DTI. The
UKLA now has (since 1 December 2001) statutory powers to impose penalties on companies and
directors and has taken responsibility for regulation of insider dealing. (Stella Fearnley et al, The
International Journal of Accounting 38 (2003) 215233)
Reforms of company law:
The Company Law Review and subsequent White Paper has generally been welcomed,
particularly the plans to define directors duties and responsibilities more clearly and to introduce
a penalty for withholding information from (in addition to refusing to supply information to) an
auditor. The present market turbulence is likely to accelerate the introduction of a new
Companies Act.
The governments interim post-Enron report:
The CGAAs interim report issued in July 2002 (CGAA, 2002) sets out key areas of potential
change to the regulatory framework for companies and for auditors.The potential changes for
companies are: a more proactive regime for monitoring accounts by the FRRP; improved
disclosure of the nature and value of nonaudit services purchased by the company; and
development of the Combined Code for corporate governance in relation to the role and
responsibilities of nonexecutive directors, with a particular focus on the relationship between the
audit committee and the auditors.
The UK governments post-Enron reforms:
In January 2003, four reports were issued by UK regulators. The two corporate governance
reports (FRC, 2003; Higgs, 2003) came first, thus enabling the CGAA to make reference to
their findings in their final report (CGAA, 2003). The CGAA report and the DTIs Review of
the Regulatory Regime of the Accountancy Profession (DTI, 2003) were issued together with
an endorsement from the Secretary of State. The package of reforms covers the following areas:
corporate governance, enforcement of compliance with accounting standards, changes to the
regulatory regime of the accountancy profession, auditor independence, audit firm transparency,
and competition implications of the UK market concentration. (Stella Fearnley et al, The
International Journal of Accounting 38 (2003) 215233)
As can be seen from the changes introduced by the CGAA to the UK framework, there is no
desire to introduce extensive legislation; and regulators wish to remain engaged with the
professional bodies and continue to delegate regulation to private sector bodies and support
voluntary codes of practice wherever appropriate. Legislation and extensive rules are seen as a
backstop only to be applied where all else fails. Principles based frameworks continue to be
supported. (Martins et al.Hospitality management accounting; 9th edition, pp346-358)

Article no.11
A computational model for financial reporting fraud detection:
A computational fraud detection model (CFDM) was proposed for detecting fraud in financial
reporting.CFDM uses a quantitative approach on textual data. It incorporates techniques that use
essentially all of information contained in the textual data for fraud detection. Extant work
provides a foundation for detecting deception in high and low synchronicity computer-mediated
communication (CMC). CFDM provides an analytical method that has the potential for
automation. It was tested on the Management's Discussion and Analysis from 10-K filings and
was able to distinguish fraudulent filings from non-fraudulent ones.CFDM can serve as a
screening tool where deception is suspected. The status of fraud detection from the analysis of
corporate financial statements can be described as follows:
1. Fraud detection is after the fact and officially recognized only after the SEC issues an AAER.
2. There are few proven quantitative methods to detect a potentially fraudulent filing [28].We did
not find any quantitative method that examined the text of the filing.
3. A high level of senior management compensation comes from stock options.The individual
manager has high potential return from financial fraud and a low potential for detection.This
leads to the conclusion that corporate fraud is likely to continue at the senior executive level[22].
(Fletcher H. Glancy et al, Decision Support Systems 50(2011)595-611)
Relevant literature:
There are two separate research literature streams providing background and basis for this
research; they are research into corporate financial reporting fraud and text-mining research.
Both of these research areas are extensive, but there has been very little crossover research. In
order to understand the basis for assuming it is possible to detect fraud from text, we examine the
body of research into deception.
Deception detection:
McCornack [32] created the Information Manipulation Theory (IMT) using Grice's cooperative
principle of communication and the maxims of expected quality, quantity, relevance, and manner
(or clarity). The deception occurs when there is a covert violation of one of the maxims. IMT
states that the four principles are independent, and violation of a single principle defines a
deceptive communication. IMT was tested and the replication of McCornack's work showed that
the maxims were not independent and that any deception would violate the quality maxim [26].
Intuitively, this is logical because violations of the quality maxim involve distortions or
fabrications of information. (Fletcher H. Glancy et al, Decision Support Systems 50(2011)595-
Fraud detection:
Most of the fraud detection research utilizing data mining techniques has focused on structured
data using quantitative methods [29]. The major categories of fraud previously investigated have
been classified into four areas: internal, insurance, credit, and telecom [34]. In the last three
areas, the emphasis is early identification of external attempts to commit fraud against a
company [17]. The internal fraud research focuses primarily at detecting employee theft at a low
level in the organization. (Baker. Advanced financial accounting; 13th edition, pp211-219)
Pattern detection in text:
The relationships between words in documents form patterns.Detection of these patterns is the
primary focus of textmining (TM) [2]. TM is a quantitative methodology that uses mathematical
methods to describe the term-document matrix and increases the density through use of a
singular value decomposition vector (SVD) [2,19]. TMis a subset of data mining that refers to
techniques used to discover unknown information fromnatural language documents [24].
TMconverts text to structured data. A primary method for dimension reduction, while retaining
the maximum amount of information, is through creation of SVD [2]. This conversion is
unidirectional. The results are no longer context specific; the results are statistics that give an
indication of the significance of the text. The actual relationships of the context are still present.
(Fletcher H. Glancy et al, Decision Support Systems 50(2011)595-611)
Computational model of fraud detection:
We have seen in the previous section that detection of deceit is possible in CMC that has low
synchronicity.Wepropose to show that it is possible to detect deceit, fraud in the case of SEC
filings, in documents that are essentially anonymous, in that neither writer nor reader are
specifically identified or known to each other. This process is based on several concepts with a
theoretical foundation in Interpersonal Deception Theory and Media Richness Theory. The
concepts are maximal information usage, writer's knowledge, and informational cues in the
development of CFDM. The model involves the following process steps:
1. Select the target companies and target document.
2. Extract the target text from the document.
3. Prepare the target text for importing into EM.
4. Import all of the target text documents into EM creating a database.
5. Stem terms to reduce the dimensions and to tag parts of speech.
6. Create SVDs to further reduce the document dimensions.
7. Cluster the document set.
8. Review and evaluate the clustering results.
9. Modify the SVD and clustering algorithm as necessary.
Following the process flow for this computational model will allow application of the model in
different domains.
Sample company selection:
Companies were selected from those SEC issued an AAER citing the company for fraud during
the years of 2006 to 2008. The four digit SIC code was used to define the industry. The study
included no more than two companies with the same SIC code. Each company that had been
accused of fraud by the SEC was matched with a company in the same SIC code and of
approximately the same size that had not been charged with fraud; and therefore, had not
submitted an amended 10-K because of an AAER. Because innocence is considerably more
difficult to prove than guilt, we set a high standard for the matching company. The primary
screening was for companies that had not amended their 10-K in the last ten years. The only
exceptions were for two companies that had not amended a 10-K in the last eight years and their
amendment was for peripheral data. This exceptionwasmade due to the difficulty of finding
companies in certain industries that had not filed amended annual reports. (Fletcher H. Glancy et
al, Decision Support Systems 50(2011)595-611)

The target document is the10-K. The preferred 10-K for testing the model was at least one year
prior to the latest period cited in the AAER. For example, if the AAER complaint accused the
company of committing fraud for period from 2002 to 2005, the 10-K for 2004 was selected for
the analysis. If the selected 10-K mentions that the SEC is investigating the company, then the
10-K for the prior year was selected. Because the SEC investigation often takes an extended
period, there were several cases where we had to go back more than one year. The matching
company 10-K was from the same time period. This was to reduce any potential bias caused by
changing accounting rules, legal requirements, or other external influences.

Fig. 1. Computational model for textual fraud detection.

(Fletcher H. Glancy et al, Decision Support Systems 50(2011)595-611)

Target text selection:
There are two major blocks of text in a 10-K, theMDAand the Notes to the Financial Statement.
An argument can be made for using either or both. Senior management assists in the preparation
of the MDA and in some cases may write portions. From IDT, if fraud exists and the writer
knows that it exists and has an incentive to deceive the reader, the MDA should provide clues of
deception or fraud even with the low synchronicity of the MDA. The accountants that prepared
the financial statements also prepared the notes. When financial reporting fraud exists, the notes
writer will have knowledge and an interest in concealing it. Since we are attempting to detect
financial reporting fraud that would involve and likely originate from senior management, we
chose to use the MDA as the target text. (Fletcher H. Glancy et al, Decision Support Systems
Text preparation:
The SEC required format for 10-K's allows for latitude in the submissions. The typical formats
are html, text, and the text source for html. Formaximumaccuracy in textmining, the data format
needs to be consistent across documents. The MDA, Sections 7 and 7(a) of the 10-K and Section
6 of the 10-KSB, were copied from the 10-K to a word processing program;MSWordwas used in
this analysis. All documents were re-formatted with sans serif font; Arial was used. The
documentswere saved in Rich Text Format (RTF) because the text-mining program was not
compatiblewith the current version ofMSWord (2007).
Document importing:
All documents were imported into a single SAS data set with the full document text retained in
an external HTML document. Retaining the entire document externally allows an unlimited
amount of text to be used for a single document and included in the analysis. A binary target was
added to the data set to indicate the presence or absence of an SEC issued AAER. (Fletcher H.
Glancy et al, Decision Support Systems 50(2011)595-611)
CFDM results review and evaluation:
Supervised expectation maximization clustering and hierarchical clustering were performed on
the SVDs created with log frequency weights and information gain term weights. The
expectation maximization clustering was unstable because of the presence of local minima and
the selection of the starting point for the partitive processing determined the endpoint [7,27,38].
The hierarchical clustering was stable with the agglomerative clustering reaching the same end
point for all clustering trials. Repeated reclustering tested both methods. As shown in Table 1,
the clustering results were able to identify potential fraud in the 10-Ks at a level of significance
greater than 0.01 (the calculated p-value was 1.21014). The statistical power was
approximately 90% [14]. Table 2 gives the highest weighted terms that define the clusters.

In addition, we assert two other significant contributions:
1. The computational model is reusable and has the potential to detect fraud in domains other
than financial reporting.
2. CFDM has the potential to serve as a filtering tool for regulators to focus their resources and
subsequently increase the detection of financial reporting fraud. (Fletcher H. Glancy et al, Decision
Support Systems 50(2011)595-611)
Conclusion and future research:
The CFDM demonstrates that it is possible to detect financial reporting fraud from the text of
annual filings with the Security and Exchange Commission. The model is generalizable because
it specifies automatable steps that can be adapted to other domains and genres. A potential
application for CFDM is to screen companies for investigation of potential fraud by the SEC.
This would allow effective use of SEC resources. Additional potential applications include
investor analysis, e-mail spam detection, and business intelligence validation. This work can be
criticized for limiting the training data set to sixty-nine companies. (Baker. Advanced financial
accounting; 13th edition, pp254-268) While the statistical power is over 90% for this sample size,
further confirmation of the discriminatory power of the CFDM by increasing the sample size
would be an area for future research. The domain of this work is limited to MDA in 10-K filings.
We do not argue that it is directly generalizable to other text submissions, but that other domains
are a fertile area for research using CFDM. The notes to the financial statements in the 10-K are
a possible area to extend CFDM without changing the domain.