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Decision Support Systems 50 (2011) 491–500

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Decision Support Systems j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / d s s

Detection of financial statement fraud and feature selection using data mining techniques
P. Ravisankar a, V. Ravi a,⁎, G. Raghava Rao a, I. Bose b a b

Institute for Development and Research in Banking Technology, Castle Hills Road #1, Masab Tank, Hyderabad 500 057, AP, India School of Business, The University of Hong Kong, Pokfulam Road, Hong Kong

a r t i c l e

i n f o

a b s t r a c t
Recently, high profile cases of financial statement fraud have been dominating the news. This paper uses data mining techniques such as Multilayer Feed Forward Neural Network (MLFF), Support Vector Machines (SVM), Genetic Programming (GP), Group Method of Data Handling (GMDH), Logistic Regression (LR), and Probabilistic Neural Network (PNN) to identify companies that resort to financial statement fraud. Each of these techniques is tested on a dataset involving 202 Chinese companies and compared with and without feature selection. PNN outperformed all the techniques without feature selection, and GP and PNN outperformed others with feature selection and with marginally equal accuracies. © 2010 Elsevier B.V. All rights reserved.

Article history: Received 20 November 2009 Received in revised form 14 June 2010 Accepted 3 November 2010 Available online 12 November 2010 Keywords: Data mining Financial fraud detection Feature selection t-statistic Neural networks SVM GP

1. Introduction Financial fraud is a serious problem worldwide and more so in fast growing countries like China. Traditionally, auditors are responsible for detecting financial statement fraud. With the appearance of an increasing number of companies that resort to these unfair practices, auditors have become...

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