Accounting Webinar (2021-01)

Topic: Using Economic Links Between Firms to Detect Accounting Fraud

Speaker: Frank Zhang, Yale University

Time: Wednesday, Jan 6^th, 10:00-11:30 a.m

Place: Microsoft Teams

Abstract:

This paper explores whether accounting fraud can be detected using the information of firms that are economically linked to a focal firm. Specifically, we examine whether customer information disclosed by a supplier firm, combined with customers’ accounting information, helps to detect the supplier’s revenue fraud. We first show that the growth rate of total customer purchases is positively associated with supplier sales growth, confirming the economic link between a firm and its customers. We then introduce two variables based on customer accounting information—(1)the discrepancy between supplier sales growth and customer purchase growth and (2) customer excess purchases—and show that they are predictive of supplier revenue fraud. We conduct a battery of cross-sectional tests to further examine the two fraud predictors and generally find empirical results to vary cross-sectionally in a predictable way. Finally, the out-of-sample tests indicate that adding the two variables to the Dechow et al. (2011) model increases fraud prediction accuracy.

Introduction:

Frank Zhang is a professor at Yale University. His research focuses on empirical capital market researches, including stock anomalies, fundamental analysis, investor and analyst behavior, management incentives, and corporate financial reporting. He has published about 20 papers in leading accounting and finance journals, such as The Accounting Review, Journal of Accounting Research, Review of Accounting Studies, Journal of Finance, and Review of Financial Studies. He is currently a member of the FARS Steering Boad and an Associate Editor of Management Science. He has a PhD from the University of Chicago.

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