This study aims to establish a rigorous and effective model to detect enterprises' financial statements fraud for the sustainable development of enterprises and financial markets. The research period is 2004-2014 and the sample is companies listed on either the Taiwan Stock Exchange or the Taipei Exchange, with a total of 160 companies (including 40 companies reporting financial statements fraud). This study adopts multiple data mining techniques. In the first stage, an artificial neural network (ANN) and a support vector machine (SVM) are deployed to screen out important variables. In the second stage, four types of decision trees (classification and regression tree (CART), chi-square automatic interaction detector (CHAID), C5.0, and quick unbiased efficient statistical tree (QUEST)) are constructed for classification. Both financial and non-financial variables are selected, in order to build a highly accurate model to detect fraudulent financial reporting. The empirical findings show that the variables screened with ANN and processed by CART (the ANN + CART model) yields the best classification results, with an accuracy of 90.83% in the detection of financial statements fraud.Keywords: financial statements fraud; data mining; artificial neural network (ANN); support vector machine (SVM); decision tree; classification and regression tree (CART); chi-square automatic interaction detector (CHAID); C5.0; quick unbiased efficient statistical tree (QUEST)
Because of the financial information asymmetry, the stakeholders usually do not know a company’s real financial condition until financial distress occurs. Financial distress not only influences a company’s operational sustainability and damages the rights and interests of its stakeholders, it may also harm the national economy and society; hence, it is very important to build high-accuracy financial distress prediction models. The purpose of this study is to build high-accuracy and effective financial distress prediction models by two representative deep learning algorithms: Deep neural networks (DNN) and convolutional neural networks (CNN). In addition, important variables are selected by the chi-squared automatic interaction detector (CHAID). In this study, the data of Taiwan’s listed and OTC sample companies are taken from the Taiwan Economic Journal (TEJ) database during the period from 2000 to 2019, including 86 companies in financial distress and 258 not in financial distress, for a total of 344 companies. According to the empirical results, with the important variables selected by CHAID and modeling by CNN, the CHAID-CNN model has the highest financial distress prediction accuracy rate of 94.23%, and the lowest type I error rate and type II error rate, which are 0.96% and 4.81%, respectively.
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