A support vector machine-based model for detecting top management fraud

Authors:
Ping-Feng Pai;Ming-Fu Hsu;Ming-Chieh Wang
Affiliations:
Department of Information Management, National Chi Nan University, Taiwan, ROC and Department of International Business Studies, National Chi Nan University, Taiwan, ROC;Department of International Business Studies, National Chi Nan University, Taiwan, ROC;Department of International Business Studies, National Chi Nan University, Taiwan, ROC
Venue:
Knowledge-Based Systems
Year:
2011

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Abstract

Detecting fraudulent financial statements (FFS) is critical in order to protect the global financial market. In recent years, FFS have begun to appear and continue to grow rapidly, which has shocked the confidence of investors and threatened the economics of entire countries. While auditors are the last line of defense to detect FFS, many auditors lack the experience and expertise to deal with the related risks. This study introduces a support vector machine-based fraud warning (SVMFW) model to reduce these risks. The model integrates sequential forward selection (SFS), support vector machine (SVM), and a classification and regression tree (CART). SFS is employed to overcome information overload problems, and the SVM technique is then used to assess the likelihood of FFS. To select the parameters of SVM models, particle swarm optimization (PSO) is applied. Finally, CART is employed to enable auditors to increase substantive testing during their audit procedures by adopting reliable, easy-to-grasp decision rules. The experiment results show that the SVMFW model can reduce unnecessary information, satisfactorily detect FFS, and provide directions for properly allocating audit resources in limited audits. The model is a promising alternative for detecting FFS caused by top management, and it can assist in both taxation and the banking system.