Accounting fraud detection through textual risk disclosures in annual reports: From the perspective of SEC guidelines

Abstract

This study investigates the use of textual risk disclosures in annual reports to detect accounting fraud. We developed an indicator system based on Securities and Exchange Commission (SEC) guidelines to evaluate the quality of risk disclosures. An analysis of 41,343 financial reports from US listed companies revealed that textual risk disclosures enhance fraud detection accuracy and function as an early warning system. The performance of these disclosures surpasses traditional analyses of the Management Discussion and Analysis section. Our findings highlight the value of textual risk disclosures in identifying accounting fraud and underscore the crucial role of regulatory guidelines in ensuring financial integrity.