The power of financial ratios in detecting fraudulent financial reporting at the Nairobi Securities Exchange
The study aimed at proving that the financial ratios currently computed by listed companies at the Nairobi Securities exchange may not assist users of the financial reports towards detection of fraudulent financial reports; other ratios can bring to light possible fraud. Unpublished related previous studies in Kenya have dealt with both companies and co-operative movements from different perspectives. The results at different levels of this study indicate that the best financial ratios able to bring to light fraudulent financial statements are; Financial Investment/Total Assets Ratio; TO/TA = Total Operating Expenses/Average Total Assets; WC/TA = Working Capital/Total Assets; CF/NP = Cash Flow/Net Profit; NP/TA = Net Profit/Total Assets; and, DIV = Dividend Return Ratio. The results support the general alternative hypothesis that financial ratios can detect fraudulent financial reporting (FFR) by listed companies in Kenya. Specific ratios not currently in use in companies‟ financial statements have the power to reveal FFR.The study used census method where all the listed companies at the Nairobi securities exchange were looked at. The analysis of ratios was conducted in all the companies‟ covariates, using the following methods: stepwise logistics regression model, discriminant analysis, and Pearson‟s correlation- a method used to measure and confirm the possibility of earnings manipulation. According to the regulator, fraud poses a threat to the future existence of companies in Kenya. The limitations to this study include: existence of a possibility of having other unidentified ratios that can detect fraud, some financial reports could not be used due to incomplete reporting structure and information, and the sample of fraudulent financial reports and non-fraudulent financial reports were limited to reported cases only. Further study is suggested to determine the extent of earnings management and the power of ratios in detection of FFR.
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