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Accounting Fraud Alert

December 15, 2009

A new algorithm looks for accounting fraud by analyzing non-financial statistics.

Transcript

BOB HIRSHON (host):
Spotting shady accounting. I’m Bob Hirshon and this is Science Update.

Accounting fraud can be hard to detect. But North Carolina State University accounting professor Joe Brazel and his colleagues have a new way to sniff it out. His team compared known fraud cases with similar, non-fraudulent companies. They looked for non-financial signs of growth, like adding employees or franchises.

JOE BRAZEL (North Carolina State University):
And for fraud firms we found a large inconsistency, meaning that the revenue growth was positive and large, and the non-financial growth was flat or negative, whereas for their non-fraud competitor, the difference was quite small.

HIRSHON:
Brazel says those non-financial measures are easy to check and hard to fake. His team’s developed a formula to flag potential cheaters. And they’re creating an online tool for investors, so they can screen a company before they buy in. I’m Bob Hirshon for AAAS, the Science Society.