Financial reporting readability and the likelihood of fraudulent financial reporting

Increased accounting fraud has rendered large companies bankrupt and raised concerns over the quality of financial statements. Therefore, investors, regulators, directors and accountants have always devoted particular attention to the detection of the potential frauds in financial statement. The literature is inclined to believe that firms with less readable financial statements are more likely to engage in fraudulent behaviors. In line with this argument, therefore, the present study seeks to investigate the impact of financial statement readability on the likelihood of corporate accounting fraud. To this end, Fog index and Flesch index were employed to measure the readability of financial statements, and the Audit Standard No. 240 was also used to identify the potential fraudulent misstatement in financial statements. The research hypothesis was designed based on a sample of 115 firms listed on the Tehran Stock Exchange over the period of 2013-2017, and then tested using the logistic multivariate regression model. The findings reveal that financial reporting readability mitigates the likelihood of accounting fraud. Also, the result of sensitivity test indicates that using an alternative proxy to measure financial reporting readability incurs no significant effect on the main results of the study, thereby confirming the robustness of the findings.