The Conformity of Fraud Incentives in Managers with Cumulative Prospect Theory Pattern through Text Analysis

Fraudulent reporting means intentional providence of false and misleading reports. Paragraph 7 of Iranian Accounting Standard No. 1 considers the board of directors as responsible for financial statements providence, however, managers may provide the firm's reports including the report of the board of directors, with fraudulent incentives. One of the theories explaining the managerial decision-making methods based on their personality traits (risk taking and risk aversion) is the Cumulative Prospect Theory (CPT). Based on this theory, fraud incentives will be formed in managers' mind when they feel their performance will go away from the reference point they have already created in their minds. This study determines an index with more than 90% accuracy for assessing and detecting the risk of fraud in the board's report, focusing the report text and using two data mining methods including decision tree and machine learning methods. Then, the index is used to examine whether the manager incentives for using high fraud risk reporting methods follow the pattern presented in cumulative prospect theory. The results indicate that managers' fraud incentives in Iran are not consistent with CPT.