Detecting fraudulent financial statement under imbalanced data using neural network

Abstract

In this paper a novel approach for detecting fraudulent financial statements by employing a combination of neural networks and synthetic minority over-sampling technique (SMOTE) is introduced. This approach is designed to tackle the problem of imbalanced datasets prevalent in fraudulent cases, which if left unaddressed will hinder the model to accurately identify fraud. Three neural network models, each representing different fraud predictors as the input layer: 28 inputs raw financial data; 14 inputs financial ratios data; and 42 inputs combination both raw financial and financial ratios data are developed. Experimental validation using established research datasets is conducted to assess the performance of the proposed method. Performance metrics, namely area under the curve (AUC), precision, and sensitivity, are used for evaluation, comparing the proposed model against existing benchmark models found in literature. Results indicate that the proposed model achieves an AUC score of 70.6% and a precision score of 2.89%, in comparable to the existing models, with a sensitivity score of 83% outperforming all counterparts. The high sensitivity rate of the proposed model underscores its practical utility for auditors and regulators, as it minimizes the risk of false negatives, thereby enhancing confidence in fraud detection.