Finding Needles in a Haystack: Using Data Analytics to Improve Fraud Prediction

53 Pages Posted: 7 Apr 2015 Last revised: 21 Apr 2016

See all articles by Johan Perols

Johan Perols

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

Robert M. Bowen

Chapman University -- The George L. Argyros School of Business & Economics; University of Washington -- Foster School of Business

Carsten Zimmermann

University of San Diego - School of Business Administration

Basamba Samba

Independent

Date Written: April 6, 2015

Abstract

Developing models to detect financial statement fraud involves challenges related to (i) the rarity of fraud observations, (ii) the relative abundance of explanatory variables identified in the prior literature, and (iii) the broad underlying definition of fraud. Following the emerging data analytics literature, we introduce and systematically evaluate three methods to address these challenges. Results from evaluating actual cases of financial statement fraud suggest that two of these methods improve fraud prediction performance by approximately ten percent relative to the best current techniques. Improved fraud prediction can result in meaningful benefits, such as improving the ability of the SEC to detect fraudulent filings and improving audit firms’ client portfolio decisions.

Keywords: Financial statement fraud, Data analytics, Fraud rarity, Risk assessment, Data rarity, Data imbalance, Undersampling

JEL Classification: M4, C1

Suggested Citation

Perols, Johan and Bowen, Robert M. and Zimmermann, Carsten and Samba, Basamba, Finding Needles in a Haystack: Using Data Analytics to Improve Fraud Prediction (April 6, 2015). Available at SSRN: https://ssrn.com/abstract=2590588 or http://dx.doi.org/10.2139/ssrn.2590588

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

Robert M. Bowen

Chapman University -- The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States
206.334.0911 (Phone)

HOME PAGE: http://https://www.chapman.edu/our-faculty/robert-bowen

University of Washington -- Foster School of Business ( email )

Box 353226
University of Washington
Seattle, WA 98195-3226
United States
206.334.0911 (Phone)

HOME PAGE: http://https://foster.uw.edu/faculty-research/directory/robert-bowen/

Carsten Zimmermann

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

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

Basamba Samba

Independent ( email )

No Address Available
United States

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