The Relation between Earnings Management and Financial Statement Fraud

Advances in Accounting, 27(1), 39-53, 2011

Posted: 25 Jan 2013

See all articles by Johan Perols

Johan Perols

University of San Diego - Department of Accountancy; University of San Diego - School of Business Administration

Barbara A. Lougee

University of San Diego School of Business

Date Written: October 1, 2010

Abstract

This paper provides new evidence on the characteristics of firms that commit financial statement fraud. We examine how previous earnings management impacts the likelihood that a firm will commit financial statement fraud and in doing so develop three new fraud predictors. Using a sample of 54 fraud and 54 non-fraud firms, we find that fraud firms are more likely to have managed earnings in prior years and that earnings management in prior years is associated with a higher likelihood that firms that meet or beat analyst forecasts or that inflate revenue are committing fraud. We further find that fraud firms are more likely to meet or beat analyst forecasts and inflate revenue than non-fraud firms are even when there is no evidence of prior earnings management. This paper contributes to the fraud detection literature and the earnings management literature, and can help practitioners and regulators develop better fraud detection models.

Keywords: Fraud, Earnings management, Analyst forecasts, Unexpected Revenue per Employee

Suggested Citation

Perols, Johan and Lougee, Barbara, The Relation between Earnings Management and Financial Statement Fraud (October 1, 2010). Advances in Accounting, 27(1), 39-53, 2011. Available at SSRN: https://ssrn.com/abstract=2206628

Johan Perols (Contact Author)

University of San Diego - Department of Accountancy ( email )

223 Olin Hall
5998 Alcalá Park
San Diego, CA
United States

University of San Diego - School of Business Administration ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

Barbara Lougee

University of San Diego School of Business ( email )

227 Coronado Hall
5998 Alcalá Park
San Diego, CA
United States
619.260.7892 (Phone)
619.260.7725 (Fax)

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