Detecting future financial statement fraud using a machine learning model in Indonesia: a comparative study

Abstract

PurposeThis study aims to compare machine learning models, datasets and splitting training-testing using data mining methods to detect financial statement fraud.Design/methodology/approachThis study uses a quantitative approach from secondary data on the financial reports of companies listed on the Indonesia Stock Exchange in the last ten years, from 2010 to 2019. Research variables use financial and non-financial variables. Indicators of financial statement fraud are determined based on notes or sanctions from regulators and financial statement restatements with special supervision.FindingsThe findings show that the Extremely Randomized Trees (ERT) model performs better than other machine learning models. The best original-sampling dataset compared to other dataset treatments. Training testing splitting 80:10 is the best compared to other training-testing splitting treatments. So the ERT model with an original-sampling dataset and 80:10 training-testing splitting are the most appropriate for detecting future financial statement fraud.Practical implicationsThis study can be used by regulators, investors, stakeholders and financial crime experts to add insight into better methods of detecting financial statement fraud.Originality/valueThis study proposes a machine learning model that has not been discussed in previous studies and performs comparisons to obtain the best financial statement fraud detection results. Practitioners and academics can use findings for further research development.

An intelligent detecting model for financial frauds in Chinese A‐share market

“…Fortunately, machine learning develops rapidly in recent years, providing efficient approaches to exploring the relationship between financial risks and the growing financial data (Du & Shu, 2022;Wu et al, 2022). Therefore, many scholars are devoted to developing novel fraud detection models using machine learning, such as Logistic Regression, Naive Bayes, Support Vector Machine, Neural Network, Random Forest, Ensemble Method and many more (Song et al, 2014;Cao et al, 2015;Vasarhelyi et al, 2015;Brown et al, 2020;Ding et al, 2020;Bertomeu et al, 2021;Chen & Zhai, 2023;Xu et al, 2023;Achakzai & Peng, 2023;Pan et al, 2023;Riskiyadi, 2023;Rahman & Zhu, 2023;Zhou et al, 2023).…”