Preventing the Unpleasant: Detecting Fraudulent Financial Statements Using Financial Ratios



















































Preventing the Unpleasant: Detecting Fraudulent Financial Statements Using Financial Ratios – Journal of Operational Risk





  • The proposed model achieves accuracy in predicting fraudulent financial statements with an accuracy rate of over 78%.
  • The proposed model contains two ratios that could serve as “red flags” in an audit process: “collection period” and “gear”.
  • Companies with no falsification show better results in their financial ratios than companies with falsification in their financial statements.
  • The proposed model could be used as an effective tool to detect fraudulent financial statements by the banking system, internal and external auditors and tax authorities.

The objective of this study is to investigate financial fraud in companies listed on the Athens Stock Exchange during the period 2008-2018, when a major economic crisis broke out in Greece. On the basis of 30 financial indicators resulting from the analysis of the financial statements, several statistical tests are applied to the primary sample and to the control sample in order to create a model using the indicators as “forecasts” to detect possible frauds. The data used in the research was obtained from financial statements of listed companies, reviews in auditors’ reports, and data and information available in Athens Stock Exchange reports. The proposed model is able to correctly classify the total sample with an accuracy of 78.4%. The research results show that the model works effectively to detect fraudulent financial statements when the economy is operating under crisis conditions. By using financial ratios, this model flags red flags for the audit process, and it could be used as an effective tool by the banking system, internal and external auditors, tax authorities and other government authorities. .

Marianne R. Winn