Detecting fraud in Chinese listed company balance sheets
Abstract
Purpose
This paper aims to investigate the links between accounting values in Chinese listed companies’ balance sheets and the exposure of their fraudulent activities.
Design/methodology/approach
Every balance sheet account is proposed to be a potential vehicle to manipulate financial statements.
Findings
Other receivables, inventories, prepaid expenses, employee benefits payables and long-term payables are important indicators of fraudulent financial statements. These results confirm that asset account manipulation is frequently carried out and cast doubt on earlier conclusions by researchers that inflation of liabilities is the most common source of financial statement manipulation.
Originality/value
Previous practices of solely scaling balance sheet values by assets are revealed to produce spurious relationships, while scaling by both assets and sales effectively detects fraudulent financial statements and provides a useful fraud prediction tool for Chinese auditors, regulators and investors.
Keywords
Acknowledgements
The paper is based upon research undertaken by Yi Wei as part of her PhD dissertation at Massey University, supervised by Dr Jianguo Chen, Associate Professor Jing Chi and Dr Carolyn Wirth. The authors thank seminar participants at the 18th New Zealand Finance Colloquium (Auckland University of Technology) and Financial Management Association (FMA) Asian (Tokyo, Japan) for their valuable comments. The authors acknowledge many helpful comments and suggestions from two anonymous reviewers. All remaining errors are our own responsibilities.
Citation
Wei, Y., Chen, J. and Wirth, C. (2017), "Detecting fraud in Chinese listed company balance sheets", Pacific Accounting Review, Vol. 29 No. 3, pp. 356-379. https://doi.org/10.1108/PAR-04-2016-0044
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited