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Keywords:

  • financial statement fraud;
  • fraud detection;
  • textual analysis;
  • linguistic markers;
  • chi-square test

SUMMARY

Unlike previous fraud detection research, a vast majority of which has focused primarily on the use of quantitative financial information to predict fraud, in this study we examine qualitative textual content in annual reports to predict fraud and see whether there are discernible differences in the writing and presentation style between companies that committed fraud and those that did not. We believe that while numeric financial information in the annual reports can hide details of fraud, textual information relating to writing and presentation styles in such reports provides valuable clues pertaining to the existence of fraud. In this study we use the chi-square test to analyse our data and test hypotheses about predictors of fraud that may explain linguistic feature variations in fraudulent and nonfraudulent annual reports. We provide new results on the usefulness of the qualitative content of annual reports in detecting fraud. Copyright © 2012 John Wiley & Sons, Ltd.