Category Archives: Fraud Science

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Science of Fraud

The Science of Fraud or “FraudScience” is the study, research, and analysis of the root causes, patterns, and propagation of fraud. All articles for this category are found by selecting the “Fraud Science” link. Specific research topics indexed under this category are defined by the link “tag” at the bottom of each posting.

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On Financial Frauds and Their Causes: Investor Overconfidence

This paper examines two possible explanations for why investors are so often and so easily taken by the likes of Robert Bennett and his New Era fraud or Nick Leeson’s sinking of the esteemed Barings Bank. I rule out the traditional explanations offered by neoclassical economics such as asymmetric information in a world of calculable risk. I argue that the literature on empirical psychology, which emphasizes how people make choices in a world characterized by uncertainty provides a more plausible explanation for why financial fraud…

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Fraudulently Misstated Financial Statements and Insider Trading: An Empirical Analysis

This study investigates the relationship between insider trading and fraud. We find that in the presence of fraud, insiders reduce their holdings of company stock through high levels of selling activity as measured by either the number of transactions, the number of shares sold, or the dollar amount of shares sold. Moreover, we present evidence that a cascaded logit model, incorporating insider trading variables and firm-specific financial characteristics, differentiates companies with fraud from companies without fraud. via JSTOR: The Accounting Review, Vol. 73, No. 1…

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Using Nonfinancial Measures to Assess Fraud Risk

This study examines whether auditors can effectively use nonfinancial measures (NFMs) to assess the reasonableness of financial performance and, thereby, help detect financial statement fraud (hereafter, fraud). If auditors or other interested parties (e.g., directors, lenders, investors, or regulators) can identify NFMs (e.g., facilities growth) that are correlated with financial measures (e.g., revenue growth), inconsistent patterns between the NFMs and financial measures can be used to detect firms with high fraud risk. We find that the difference between financial and nonfinancial performance is significantly greater for firms…

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