How Can Capital Market Participants Detect Financial Statement Fraud?

The primary purpose of the current study is to examine the effectiveness of three popular forensic accounting tools to detect financial statement fraud at a real US-listed firm, whose accounting practices were investigated by the US Securities and Exchange Commission (SEC). In this paper, I implement the Dechow et al. (2011) F-Score, Beneish et al. (2013) M-Score, and Lundholm and Sloan (2017) accruals-based approach and show how these three analytical procedures can help investors, financial analysts, and auditors to assess the quality and sustainability of a firm’s profitability. The findings of this study should be of interest to several constituents, including: i) capital market participants, who may want to complement their portfolio of financial ratios with rigorous and robust approaches to detect financial shenanigans; ii) accounting educators, who may find interesting the case study for their auditing and fraud examination courses; and iii) accounting researchers, who may choose to investigate the effectiveness of these quantitative techniques to timely detect accounting fraud perpetrated by firms that were targeted by the SEC and/or activist short-sellers