Using random forest and artificial neural network to detect fraudulent financial reporting: Data from listed companies in Vietnam.

The study aims to report empirical findings of quantitative research investigating what variables are significant leading proxies of fraudulent financial reporting (FFR) and the performance of the fraud detection model. The paper used financial and non-financial proxies as indicators to detect FFR with the panel data of 2235 observations of listed companies on the Vietnamese Stock Exchange from 2014 to 2020. Based on the materiality principle in auditing, the study divided the profit variance ratio into four material fraud thresholds of over 5%, 10%, 20%, and 50%. Two data mining techniques were employed: random forest for the classification model and an artificial neural network for building the best fraud prediction model. The findings show that the average accuracy of the prediction results of the random forest algorithm (RFA) reaches 91% for a material fraud threshold of 5%; when the materiality of fraud increases to above 50% of profit variance, the predictability is 98%. The average prediction accuracy of an artificial neural network (ANN) for the training set is 99%, and the test set is 97% at different fraud thresholds. These results confirm that RFA and ANN give a high accuracy in predicting fraud, and the determinants of firms committing to FFR are proxies of financial stability, followed by cash in the business and the nature of the industry. Notably, the three most important proxies related to FFR include return on total assets, return on equity, and EBT on total assets. The findings have practical implications: to identify fraudulent firms, creditors, analysts, and other stakeholders should use financial and non-financial ratios and employ data mining techniques instead of traditional fraud detection methods. [ABSTRACT FROM AUTHOR]