Financial Statement Ratio Analysis Raise Red Flags for Financial Reporting Fraud

Abstract

Fraudulent Financial Reporting occurs when agents manipulate financial statements for personal gain, taking advantage of information asymmetry and limited monitoring. The purpose of this study is to investigate how financial statement ratio analysis raises red flags and alerts to potential financial reporting fraud. Various ratios, such as leverage, profitability,

asset composition, liquidity, and capital turnover, are discussed in relation to their potential indicators of financial statement fraud. Red flag is a warning that fraud might happen in the companies. With many indicators or characteristics being guided by the regulators and authorities, we can detect the companies involved with fraud or not by just looking its financial ratios. Many researchers and scholars conduct the research related to this, and it was found that the financial ratios analysis can be used as a tool in detecting fraud in the financial statements. By analysing the financial ratio, the company and its stakeholders can analyse the possibility of fraud to happen before they invest in the company if they are intended to do so. These results prove empirically that the red flag in the ratios can detect fraudulent financial statements.