Fraud Detection and Corporate Filings

Abstract

This chapter is focused on detection of fraud in organizations by using content-based analysis on the annual reports issued by firms. Unlike a variety of previous work on fraud detection that have used quantitative financial information, this research examines qualitative textual content in annual reports to decipher evidence of fraud embedded in these reports through careful examination of the tone, content, and emphasis across reports. The basic premise of this research is that organizations tend to camouflage negative findings to sound less damaging. The real intent of the writer is hidden in content but can be revealed through structured content analysis. Using a corpus of annual reports of companies where fraud has occurred and juxtaposed with companies where fraud has not been detected, this study systematically examines the differences in the use of language. The results of this study reveal that fraudulent annual reports exhibit themes of optimism, variety, complexity, activity, and passivity. On the other hand, nonfraudulent annual reports exhibit themes of certainty and realism.