Detection of Financial Statement Frauds Using Beneish Model: Empirical Evidence from Listed Pharmaceutical Companies in Bangladesh

Document Type: Original Research

Authors

Department of Accounting & Information Systems, University of Dhaka, Dhaka, Bangladesh

Abstract

Financial statement fraud had the most significant financial impact on companies when compared to the other categories of occupational fraud as per ACFE Report to the Nations 2014. This study aims to determine the value of Beneish M-Score and to identify whether selected pharmaceutical companies were manipulating there earnings or not. Financial information of 14 pharmaceutical companies was collected from their annual reports of 2014-18. This study finds that pharmaceutical companies of Bangladesh are engaged in Earnings Manipulation and they are doing it on a continuous basis. The results of our study show a deteriorating financial condition of pharmaceutical industry which should make the auditors and regulators more cautious in detecting financial statement frauds.

Keywords


Charitou, A., Lambertides, N., & Trigeorgis, L. (2007). Managerial discretion in distressed firms. The British Accounting Review, 39(4):323-346.
Ahmed, H., & Azim, M. (2015). Earnings Management Behavior: A Study on the Cement Industry of Bangladesh. International Journal of Management, Accounting and Economics, Vol. 2, No. 4,.
Ahmed, T., & Naima, J. (2016). Detection and Analysis of Probable Earnings Manipulation by Firms in a Developing Country. Asian Journal of Business and Accounting, 9(1), 59-81.
Ali, M. A. (2018). Detection of Earnings Management: A Study on Two selected industries. Dhaka.
Amat, O., Elvira, O., & Platikanova, P. (2008). Earnings management and audit adjustments: An empirical study of IBEX 35 constituents. https://ideas.repec.org/p/upf/upfgen/1129.html.
Association of Certified Fraud Examiners. (2003). Financial Statement Fraud, Part One. Texas, Austin, USA: Association of Certified Fraud Examiners.
Association of Certified Fraud Examiners. (2014). Report to the Nations on Occupational Fraud and Abuse. Austin, Texas: Association of Certified Fraud Examiners.
Barsky, N. P., Catanach, A. H., & Rhoades-Catanach, S. C. (2003). Analyst tools for detecting financial reporting fraud. Commercial Lending Review, 18(5), 31-36.
Beneish, M. (2001). EM: a perspective. Managerial Finance, 27(12), 3–17.
Beneish, M. D. (1997). Detecting GAAP violation: Implications for assessing earnings management among firms with. Journal of Accounting and Public Policy, 16(3), 271---309.
Beneish, M. D. (1999). The Detection of Earnings Manipulation. Financial Analysts Journal, 55(5), 24-36.
Beneish, M. D., & Press, E. (1993). Costs of Technical Violation of Accounting-Based Debt Covenants. The Accounting Review, 68(2), 233-257.
Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24(1).pp 99-126.
Burgstahler, D., & Eames, M. (1998). Management of Earnigs and analysts forcasts. Unpublished working Paper,University of Wasgington.
Cressey, D. R. (1954). Other People’s Money: A Study in the Social Psychology of Embezzlement. American Journal of Sociology, 59(6), 604-604.
Curtis, P., & Thalassinos, J. (2005). Equity fund raising and ‘creative’ accounting practices’:indications from Athens Stock Exchange for the 1999-2000 period. European Research Studies, 8, 2-10.
DeAngelo, L. (1988). Managerial compitition,information costs,and corporate governance:The use of accounting performance measures in proxy contests . Journal of Accounting & Economics , 10,3-36.
Dechow, P. M., Larson, G. W., & Sloan, R. G. (2011). Pre-dicting material accounting misstatements. Contemporary Accounting Research, 28(1), 17–82.
Dechow, P., & Skinner , D. (2000). EM:Reconciling the views of accounting academics,practitioners and regulators . Accounting Horizons, 14(2),235-250.
DuCharme, L., Malatesta, P., & Sefcik, S. (2004). Earnings management, stock issues, and and shareholder lawsuits . Journal of Financial Economics, pp.27-49.
Eng, L. L., Sun, L., & Vichitsarawong, T. (2014). Are International Financial Reporting Standards–Based and U.S. GAAP–Based Accounting Amounts Comparable? Evidence From U.S. ADRs. Journal of Accounting, Auditing & Finance, 29(2), 163-187.
Fridson, M. S. (1993). Financial Statement Analysis: A Practitioner's Guide. John Wiley, New York.
Fung, A. (2015). Putting the Public Back into Governance: The Challenges of Citizen Participation and Its Future. Public Administration Review, 75(4), 513-522.
Healy, P., & Wahlen, J. (1999). A Review of the EM Literature and its Implications for Standard Setting. SSRN Electronic Journal.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
Jung, B., Lee , W.‐J., & Weber, D. P. (2014). Financial Reporting Quality and Labor Investment Efficiency. Contemporary Accounting Research, 31(4), 1047-1076.
Khan, A. R., & Akter, M. (2017). An Analysis of Earnings Management: Evidence from Food & Allied Industry of Bangladesh. International Journal of Accounting & Financial Reporting, 7(2), 359-372.
Kramer, J., & Chen, J. (2010). Title of the Article. Journal Name, 110-313.
Legoria, J. (2000). Earnings Management ,The Pharmaceutical Industry and Healthcare Reform: A test of Political cost hypothesis . Research in Accounting Regulations , volume 14,131-131.
Leuz, C., Nanda, D., & Wysocki, P. (2003). Earnings Management and investor protection:an international comparison. Journal of Financial Economics , 69(3),505-527.
Lev, B., & Thiagarajan, R. (1993). Fundamental Information Analysis. Journal of Accounting Research, 31(2), 190-215.
Levitt, A. (1998). The Numbers Game. Securities and Exchange Commission, U.S.
Mao, Y., & Renneboog, L. (2014). Do Managers Manipulate Earnings Prior to Management Buyouts? London: HLS Forum on Corporate Governance and Financial Regulation(https://corpgov.law.harvard.edu/2014/01/17/do-managers-manipulate-earnings-prior-to-management-buyouts/).
Marnet, O. (2008). Behaviour and rationality in corporate governance. International Journal of Behavioural Accounting and Finance, 1(1), p.4.
Mostafa, W. (2017). The impact of EM on the value relevance of earnings. Managerial Auditing Journal, 32(1),50-74.
Mulford, C. W., & Comiskey, E. E. (2002). The Financial Numbers Game: Detecting Creative Accounting Practices. New York: John Wiley & Sons Inc.
Muttakin, M., Khan, A., & Mihret, D. (2017). Busoness group affiliation,EM and audit quality:evidence from Bangladesh. Managerial Auditing Journal, 32(4/5),427-444.
Nwoye, U., Obiorah, J., & Chukwunonso, E. (2015). Assessing the Risk of Fraud in Published IFRS and Nigerian GAAP Financial Reports: A Comparative Application of the Beneish Models. The IUP Journal of Accounting Research & Audit Practices, 14(1), 21-42.
Omar, N., Koya, R. K., & Sanusi, Z. M. (2014). Financial Statement Fraud: A Case Examination Using Beneish Model and Ratio Analysi. International Journal of Trade, Economics and Finance, 5(2), 184-186.
Orellana, A. R., Romero, M. J., & Garrido, T. M. (2017). Measuring fraud and earnings management by a case of study: Evidence from an international family business. European Journal of Family Business, 7, 41-53.
Paynee, Jeff, & Robb, S. (1997). Earnings Management:The effect of ex ante earnings expectations. unpublished working paper ,University of Missouri.
Pearosn, O. S. (1995). Using financial statement data to identify factors associated with fraudulent financial reporting. Jour-nal of Applied Business Research, 11(3), 38-46.
Perry, S., & Williams, T. (1994). Earnings Management preceding management buyout offers. Journal of Accountng & Economics, 18,157-179.
Rahman, M., Moniruzzaman, M., & Sharif, J. (2013). Techniques,Motives and Controls of EM. International Journal of Information Techonology and Business Management , 11(1),22-34.
Razzaque, M., Rahman, M., & Salat, A. (2006). Earnings Management :An analysis of Textile sector of Bangladesh. Cost and Management, 34(5),pp.5-13.
Rosner. (2003). Earnings manipulation in failing firms. Contemporary Accounting Research, (20) 361–408.
Sakib, I. A. (2019). Detection of Earnings Manipulation Practices in Bangladesh. International Journal of Management, Accounting and Economics, 6(8), 616-631.
Salvato, C., & Moores, K. (2010). Research on Accounting in Family Firms: Past Accomplishments and Future Challenges.  Family Business Review, 23(3), 193-215.
Siegel, J. G. (1991). How to Analyze Businesses, Financial Statements, and the Quality of Earnings. Prentice Hall, New Jersey, 2nd Edition.
Summer, S., & Sweeney, J. (1998). Fraudulently misstated fi-nancial statements and insider trading: An empirical anal-ysis. The Accounting Review, 1, 131–146.
Sun, L., & Rath, S. (2009). An Empirical Analysis of Earnings Management in Australia . International Journal of Social, Behavioral, Educational, Economic, Business and Industrial Engineering, Vol:3, No:7.
Tarjo, & Herawati, N. (2015). Application of Beneish M-Score Models and Data Mining to Detect Financial Fraud. Procedia - Social and Behavioral Sciences, 21(1), 924-930.
Teoh, Hong, S., Welch, I., & Wong, T. (1998). Earnings Management and the long run makrket performance of Initial Public Offering. Journal of Finance, forthcoming.
Teoh, S., Wong, T., & Roa, G. (1998). Incentives and opportunities for Earnings Management in initial public offering. Review of Accounting Studies, forthcoming.
Thiruvadi, S., & Huang, H.-W. (2011). Audit committee gender differences and earnings management. Gender in Management: An International Journal, 26(7), 483-498.
Watson, J., Taylor, A., Haffman, T., Jorge, A., Sulivan, B., Chung, D., et al. (2009). Title of the Book. New York: Publisher.
Weil, R. (2009). Quality of earnings and EM : A Premier of audit committee numbers . Financial Accounting.
Wiedman, C. I. (1999). Instructional case: Detecting earnings manipulation. Issues in Accounting Education, 14(1), 145-176.