Predicting fraudulent financial reporting using artificial neural network

Abstract

Purpose This paper aims to explore the effectiveness of an artificial neural network (ANN) in predicting fraudulent financial reporting in small market capitalization companies in Malaysia. Design/methodology/approach Based on the concepts of ANN, a mathematical model was developed to compare non-fraud and fraud companies selected from among small market capitalization companies in Malaysia; the fraud companies had already been charged by the Securities Commission for falsification of financial statements. Ten financial ratios are used as fraud risk indicators to predict fraudulent financial reporting using ANN. Findings The findings indicate that the proposed ANN methodology outperforms other statistical techniques widely used for predicting fraudulent financial reporting. Originality/value The study is one of few to adopt the ANN approach for the prediction of financial reporting fraud.