Ratio of Income Tax Expense to Operating Income as an Indicator of Fraud.

摘要

Financial statement fraud is so prevalent that the American Institute of Certified Public Accountants (AICPA) and the Securities and Exchange Commission (SEC) both issued guidelines dealing with revenue recognition specifically because the majority of financial statement fraud involves overstating revenue. The specific problem addressed by this study was that although there are analytical procedures used throughout the audit process, only 10% - 12% of detected frauds are found using this method. Research has shown that companies with large differences between reported net income and taxable income showed among other things, fraudulently overstated earnings compared to companies with average differences. The study examined how income tax expense related to operating income, which included all revenue less expenses but before income taxes payable; and, whether the ratio of income tax expense to operating income differs for public companies with and without detected financial statement fraud. The full census sample included examination of fraud firms and non-fraud firms for all cases occurring between the years 1993 and 2005. The data was analyzed using descriptive statistics including measurements of central tendency and variability and inferential statistics including z-scores and Pearson's correlation coefficient. The results indicated that there is a relationship between non-fraud income tax expense and income before income taxes r = .996, N = 332, (p < .01), two tails, and for fraud firms, there is a correlation between income tax expense and income before income taxes r = .963, N = 386, (p < .01), two tails. This research also indicates that a correlation exists for non-fraud firms between income tax expense and operating income, r = .702, N = 196, (p < .01), two tails and for fraud firms r = .842, N = 386, (p < .01), two tails. Finally, the results also indicate there may be a significant correlation between the ratio of income tax to operating income for fraud firms compared to the ratio of income tax expense to operating income for nonfraud firms where r = .169, N = 196, (p < .05), two tails. Converting the fraud ratio to a z-score demonstrates that any ratio greater than .46 gives a greater than 50% chance of indicating fraud (Field, 2009).