Detection of financial statement fraud and feature selection using data mining techniques

a r t i c l e i n f o Keywords: Data mining Financial fraud detection Feature selection t-statistic Neural networks SVM GP Recently, high profile cases of financial statement fraud have been dominating the news. This paper uses data mining techniques such as Multilayer to identify companies that resort to financial statement fraud. Each of these techniques is tested on a dataset involving 202 Chinese companies and compared with and without feature selection. PNN outperformed all the techniques without feature selection, and GP and PNN outperformed others with feature selection and with marginally equal accuracies. Financial fraud is a serious problem worldwide and more so in fast growing countries like China. Traditionally, auditors are responsible for detecting financial statement fraud. With the appearance of an increasing number of companies that resort to these unfair practices, auditors have become overburdened with the task of detection of fraud. Hence, various techniques of data mining are being used to lessen the workload of the auditors. Enron and Worldcom are the two major scandals involving corporate accounting fraud, which arose from the disclosure of misdeeds conducted by trusted executives of large public corporations. Enron Corporation [17] was an American energy company based in Houston, Texas. Before its bankruptcy in late 2001, Enron was one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with revenues amounting to nearly $101 billion in 2000. Long Distance Discount Services, Inc. (LDDS) began its operations in Hattiesburg, Mississippi in 1983. The company's name was changed to LDDS WorldCom [18] in 1995, and later it became WorldCom. On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest such filing in US history at that time. Financial statements are a company's basic documents to reflect its financial status [3]. A careful reading of the financial statements can indicate whether the company is running smoothly or is in crisis. If the company is in crisis, financial statements can indicate if the most critical thing faced by the company is cash or profit or something else. All the listed companies are required to publish their financial statements every year and every quarter. The stockholders can form a good idea about the companies' financial future through the financial statements, and can decide whether the companies' stocks are worth investing. The bank also needs the companies' financial statements in order to decide whether to …