The Empirical Study Of Using Nonfinancial Information Identify Financial Reporting Fraud

With the development of economy, financial reporting fraud in public company becomes more and more fearful among global countries. Although regulators and auditors have made great efforts, they still ca n’t prevent financial reporting fraud. It will result in stock price fluctuation. It will attack the confidence of investors. Even more serious is it will damage the effectiveness of capital market. So it is always a matter of concern for regulators and auditors that how to identify financial reporting fraud. Considering that financial information is more conveniently manipulated by management, while nonfina ncial information is difficult to manipulate and they can reflect economic activity in public company, it is expected to study the relationship between nonfinancial information and financial reporting fraud and construct a model to identify fraud in this paper. This model is to help regulators to identify financial reporting fraud, improve capital market efficiency and reduce the economic loss of investors.This paper selects fraud and non- fraud companies from 2010 to 2014 in SSE and SZSE for research. After reading a lot of articles of Fraud Motivation Theory, Fraud Identification Theory and Fraud Identification Model and summerizing predecessors’ research achievement in financial reporting fraud identification and earnings management, this paper establishes an analysis system of financial reporting fraud identification with nonfinancial information. This dissertation empirically tests the relationship between nonfinancial information which represented by four elements including company operation, corporate governance, operation risk and audit information and financial reporting fraud. The results prove that: Firstly, there are significant difference between fraud samples and non-fraud ones in four element indicates. Secondly, compare with non-fraud companies, fraud firms have greater difference between their percent change in assets growth and their percent change in revenue growth which represents as company operation indicate. Thirdly, non- fraud firms have greater ownership concentration and institutional ownership ratio than fraud companies. Fourthly, cash recovery for all assets in fraud firms is remarkably lower than non- fraud ones, but financial instability and management risk preference are obviously greater. Fifthly, fraud companies were issued more non-standard audit opinions than non-fraud firms.Based on the above conclusion, this article proposes advises as follows: Firstly, pay attention to the contradictions between corporate business performance information and analyze if there are contradictions between companies operation scale information and income growth data so that to identify financial r eporting fraud. Secondly, attention the governance structure of public companies, think about the proportion of the top five shareholdings, if there are institute investors or the proportion of institutional ownership. Focus on the firms which have too low ownership concentration and proportion of institutional ownership. Thirdly, attach importance to operation risk information of a company, in which management risk preference are obviously greater than common companies. Regulators and auditors should pay more attention that if it has invested great risk project and examine the profit of the project. Also the difference between operating profit and operating cash flow should be examined. In addition, the ability of producing cash in a company needs to be inspected by calculating cash recovery for all assets. Think about operation risk caused by those three elements, so that people can assess financial reporting fraud. Fourthly, attention more non-standard audit opinions of public companies, because this means they probably have some serious problems.