Financial proportions between fraudulent and nonfraudulent firms: Evidence from Tehran Stock Exchange

Abstract

Fraud is a broad concept with two basic types seen in practice. The first is the misappropriation of
assets and the second is fraudulent financial reporting. Fraudulent financial reporting usually occurs in
the form of falsification of financial statements in order to obtain some forms of benefit. The current
research compares the financial ratios between fraudulent and non-fraudulent firms for the companies
listed on Tehran Stock Exchange. The sample consists of 134 companies from 2009-2014 and for testing
the hypothesis Independent sample t-test was exerted. The results show that there is a significant
difference between the means of Current Assets to Total Assets, Inventory to Total Assets and Revenue
to Total Assets ratios. This means that management of fraud firms may be less competitive than
management of non-fraud firms in using assets to generate revenue. Management may manipulate
inventories. The company may not match sales with corresponding cost of goods sold, thus increasing
gross margin, net income and strengthening the balance sheet. In addition, manipulation of inventory is
in form of reporting inventory lower than cost or market value, and companies choosing not to record
the obsolete inventory. Higher or lower margins are related to the issuing of fraudulent financial
reporting. In addition, the results show that there is not a significant difference between the means of
Total Debt to Total Equity, Total Debt to Total Asset, Net Profit to Revenue, Receivables to Revenue and
Working Capital to Total Assets ratios.