Study on the Identification of Corporate Financial Fraud Pathways -- Evidence from Systems Engineering Theory

: To study the relevant factors affecting corporate financial fraud and the interaction between factors, this paper extracts 19 factors affecting corporate financial fraud from 5 aspects. Then it divides the hierarchy using the interpretative structural modeling (ISM) respectively to clarify the logical relationships and calculate the values of dependency and driving force jointly with the Fuzzy MICMAC (MICMAC) to categorize the indicators affecting financial fraud. We found that: 6 indicators, such as profit and tax mismatch, are the key factors influencing corporate financial fraud and will directly lead to fraud; 6 indicators, such as income and long-term asset variation, have a high degree of correlation with other indicators and a wide range of influence on fraud; 7 indicators such as excessive managerial power, have a low probability of being influenced by other factors but have a higher probability of influencing other factors. Combining the research results with the actual situation, we finally provide suggestions for solving corporate financial fraud from 3 perspectives.


Introduction
As the scope of international securities trading continues to expand, corporate financial fraud occurs occasionally. Suppose the company's financial fraud can directly interfere with the regular operation of the capital market [1]. In that case, false financial information can also affect the macro-control of the state [2]. Therefore, an in-depth analysis of the financial fraud for the identification, prevention and governance of corporate financial fraud behavior to provide a theoretical basis. Many studies have been conducted to explore financial fraud fully: TANG [3] took the case of CITIC Guoan as an example. According to the fraud triangle theory. It is found that high promises of management in performance, and inadequate supervision can lead to corporate fraud. Therefore, strengthening the professional ethics of relevant personnel is the core of financial fraud prevention. YANG & SUN [4]used cite space text visualization to conduct visualization graph analysis for core journals on financial fraud, to sort out the overall trend of financial fraud and summarize the hot research in related fields on financial fraud. XU & ZHANG [5] compared the motives of financial fraud at home and abroad and found that there is a lack of systematic theoretical research in this area, taking luckin coffee and other companies' financial fraud as examples. Therefore, we analyze the multiple factors of financial fraud of listed companies from three dimensions: individual, organization and society.FENG & ZHANG [6] took the financial fraud case of furan pharmaceutical as an example from the perspective of behavioral economics, firstly, the framing effect, loss aversion, and anchoring effect as the theoretical basis, then study the managerial values and external supervision, and finally propose measures from the market and legal level to regulate the company's business behavior.ZHANG & HU [7] conducted a revolutionary game from the perspective of game theory to solve the dilemma of financial fraud in listed companies and proved the necessity and implementability of financial fraud management in the stock market by calculating the path and strategy options for listed companies and regulators to solve their dilemma.HU [8] analyzed the reasons and processes of IPO financial fraud of case companies based on grounded theory and concluded the mechanism of the role of Fraud impact factor on financial fraud,and propose suggestions on IPO financial fraud from three aspects: regulatory agencies, intermediary, and issuer.WANG [9] took Kangmei Pharmaceuticals as an example，and four impact factors of GONE theory as the starting point made a analysis of the financial fraud of the enterprise and proposed the audit problems, such as unreasonable confirmation procedure and failure of income recognition process behind the financial fraud.LI [10] took listed companies as a sample and, by testing the relationship between financial fraud and tax aggressiveness based on the Economic Model of Crime Theory, concluded that external supervision mechanism has a moderating effect on the relationship between them and effectively inhibits the simultaneous occurrence of two types of Typical opportunism in listed companies.
Throughout the previous studies, many methods and effective analyses have been proposed for identifying factors, factor analysis, and countermeasure suggestions of financial fraud. However, the interactions among the fraud elements have not been used as a foothold to analyze the impact of corporate fraud, and the relationship between the factors is still unclear. Therefore, this paper introduces system engineering theory and uses twodimensional diagrams based on ISM and MICMAC to explore the logical relationships between the above factors. First, this paper constructs a fraud factor system containing 19 indicators, uses ISM to effectively identify the hierarchy among factors, and associates MICMAC to classify the factors and dig out the important factors affecting fraud. This paper aims to provide new research ideas for analyzing financial fraud and improving the reliability of corporate fraud prevention and identification assessment.

Construction of a system of factors
influencing corporate financial fraud

Financial quality
Financial quality is used to analyze anomalies in financial statement accounts or tax indicators, which can directly impact the final financial report. The collinearity and cross-validation of financial statements is a direct entry point to identify financial fraud, which corresponds mainly to the accounting voucher to financial reporting link [11]. Fraud in this segment mainly involves accounting manipulation, which can be reflected in financial data and indicators, fiscal and tax differences, etc.: abnormal linkage between revenue and long-term assets may lead to fictitious sales revenue, use of projects to transfer internal funds outside the body, and then fictitious long-term assets such as construction in progress, resulting in tax evasion by mismatching profit and tax expense. There is also the possibility of fictitious interest through capitalizing on borrowings, resulting in fictitious interest. There are also fictitious or concealed assets arising from abnormal long-term asset values.

Business condition
The process of collecting industry status is the basis for supporting the financial performance of enterprises. The final financial results come from reasonable industry and business characteristics, and its fraud is often based on fictitious transactions. It can be embodied as follows: the unit price of the product is much higher than the average selling price of the industry, can suspect that the use of human operation to increase the selling price and issue false transaction invoices is fraudulent; the sales or project completion cycle does not match the actual situation of the industry, which may be through fictitious sales business and excessive business turnover; if the noncurrent assets of enterprises do not match the scope of the industry, there is the possibility of transferring inappropriate assets to cover up the business performance of enterprises; when the operating condition is abnormal, but the enterprise in order to attract investors, and then fictitious profits or income, whitewash financial fraud.

Corporate structure
This dimension focuses on the actual controller within the company as the starting point and then understands the fraud related to corporate governance mechanisms, behavioral governance of participants, and other relevant aspects. Analyzing financial fraud from this perspective helps to identify the motives for fraud and clarify the path of collusion and conspiracy among the relevant personnel [11]. Financial fraud can be manifested as shareholder shareholding variation--this may be caused by the person concerned to change the nature of corporate ownership so that they can apply different accounting methods under different systems and carry out unreasonable profit control behavior. If the listed company is involved in a betting agreement, it is necessary to consider whether the operating conditions are falsified to complete them. If there is improper consolidation of financial statements, attention should be paid to whether there is any unreasonable offsetting behavior of internal profit and loss. Suppose the shareholder's equity pledge is high. In that case, the controlling shareholder may be suspected of fraudulent acts of falsifying the actual operating condition and capital of the enterprise by using equity pledges and other means.

Liquidity
Liquidity usually refers to the capability and debt-paying ability of an enterprise's assets without loss of value, in addition to the liquidity of the relevant accounting institutions and policy changes introduced in this paper. Therefore, this liquidity can reflect the business level as well as the sustainable development ability of the enterprise. Unreasonable liquidity will cause high financing pressure, few financing channels, limited available funds and a reduction of credibility to the enterprise, which will be detrimental to the peaceful development of the enterprise. So, fraud in this area is mainly reflected in the following aspects: the unrealistic flow turnover rate may be the possibility of sales revenue; the frequent changes of accounting policy reflects that the enterprise may falsely conceal the actual situation; the frequent changes in accounting policies used are suspected of fraud such as tax evasion.

Internal control
Internal control refers to the process implemented by the board of directors, management and other employees of an enterprise to provide assurance that the efficiency of operations and reliability of financial reporting. This component is often associated with assessing fraud risk at the level of identification of transactions, account balances and disclosures [12]. Fraud can be demonstrated as irregular related party transactions -if management has too much power, it is easy to weaken the monitoring role of the board of directors and provide opportunities for management to falsify sales performance for fraud. Customers and suppliers belonging to the same interest entity or group can create the possibility of upstream and downstream collusion fraud, fictitious business and inflated revenue. An inadequate internal control system will reduce the role of restraint and supervision in selfinterested staff behavior, which will generate fraudulent behavior of fictitious cash flow or inventory. Fictitious sales revenue, use of corporate projects, etc., to transfer internal funds outside the body to generate nonexistent sales returns, and then fictitious long-term assets such as construction in progress [11] Profits and taxes mismatch X 2 Accrual but not payment of tax payable; tax evasion by using confusing product tax rates or improper tax incentives, etc. [11] Borrowing interest capitalization X 3 The interest on borrowings that should be included in finance costs is falsely reduced and instead is included in the interest incurred before the fixed assets are put into operation, i.e., as a component of fixed assets. [12] Abnormal long-term asset value X 4 Fictitious transfer of long-term assets and concealment of the existence of intangible assets or fixed assets; falsification of the useful life of assets and reduction of amortization expense, [12] Business condition Product unit price is much higher than the average industry price.

X 5
Using artificial manipulation to increase sales prices, create false invoices for sale and purchase transactions, and ultimately falsify sales revenue [11] Abnormal sales or project completion cycle Colluding with related enterprises to falsify sales revenue and returns through fictitious projects to falsely increase enterprise turnover. [11] Non-current assets are inconsistent with the development of industry operation.

X 7
Fictitious assets, asset classes unrelated to the actual industry, transfer of inappropriate assets to conceal the business development of the enterprise [12] Abnormality between operating conditions and industry environment X 8 The general industry environment is poor, and the overall industry is under pressure, but in order to attract investors, fictitious profits or revenues are made up to whitewash financial statement . [13] Corporate structure High shareholder equity pledge X 9 Controlling shareholders use equity pledges to realize the in vivo flow of extracorporeal funds and implement falsification of the actual operating conditions of the enterprise. [11] Listed companies involve gambling agreements and are X 10 Falsifying the true financial situation of the enterprise to meet the betting conditions, falsifying the false business status by inflating revenue assets or inflating liabilities. [11] demanding Changes in the shareholding ratio of major shareholders X 11 Change the selection of accounting methods, such as the cost and equity methods, by changing the shareholding percentage and unreasonably regulating profits. [ The group uses related party transactions internally to allow the seller to invoice at a fictitiously high price while the buyer buys at a low price to reduce costs and gain spread [12] Excessive managerial power X 17 Intervention in the activities of theboard of directors, weakening the monitoring role of managers, and management's falsified sales performance [13] secret relationship between customers and suppliers. Reduce the effect of restraint and oversight on self-interested behavior of staff, resulting in fictitious cash flows or inventories [13]

ISM method
The interpretative structural modeling (ISM) is a method proposed by Warfield in 1974 to analyze the hierarchical structure among factors. Its core idea is to use mathematical logic and graphical theory, intending to establish the structural matrix which reflects relationships among the elements of the system. The model can effectively analyze the diversified influence relationships among the factors and reveal the correlation and transmission mechanism of the complex elements in the system [14]. The steps of ISM calculation construction are as follows: STEP 1: Identification and screening of influencing factors (1) S i denotes the ith fraud risk factor, and there are n influencing factors. STEP 2: Construction of adjacency matrix A. Using the Delphi method, experts are asked to score the relationship between the influencing factors separately, and the influence between two factors is 1. Otherwise, it is 0, i.e., there is no influence, and then the adjacency matrix is constructed.
(2) STEP 3: Calculate the reachability matrix M.Using the sum of adjacency matrix, A and unit matrix I, i.e., A+I, operate when A satisfies the following equation, is the reachable matrix of matrix A. k is an integer.
According to the principle of hierarchical decomposition, the element with is identified as the criterion for selecting the first hierarchical element. The element with is selected as the second hierarchical element after the element of this hierarchy is drawn out, and so on, after that, the influencing factors of each hierarchy can be obtained.

MICMAC Method
The cross-influence matrix multiplication method (MICMAC) is a structured method proposed by French scholars Duperrin and Godet in 1973. The basic concept is that a factor m will affect factor n, and factor n will simultaneously affect another factor z. Then it can be concluded that a change in factor m will affect factor z. [15]. Therefore, in this paper, after the hierarchical classification of the indicators using the ISM method, the driving forces and dependencies of the variables are calculated by combining the reachability matrix M. According to this method, they are specifically classified into four different quadrant categories: autonomous quadrant (I), dependent quadrant (II), linkage quadrant (III) and independent quadrant (IV) [16]. The MICMAC calculation is constructed as follows: STEP 1: Calculate the driving force. After horizontal summation, the sum of the indicators in the reachable matrix M is used as the driving force D a . The relevant formula is.

(5)
S i is the risk factor in the reachable matrix M, and a is the row where the risk factor is located. STEP 2: Calculate the dependency. The sum of the indicators in the reachable matrix M is summed vertically as the dependency R b . The relevant equation is: (6) S i is the risk factor in the reachable matrix M, and b is the risk factor listed. STEP3: Make two-dimensional table. The calculated drivers and dependencies are divided into the above four quadrants using two-dimensional coordinates. The average value of drivers and dependencies is used as the dividing line between the quadrants. Finally, each indicator is assigned to different quadrants.

Collection of raw data
In this paper, five authoritative experts, including two enterprise experts and three university experts, were invited to consult with relevant experts, and reviewed the questionnaires of relevant papers, finally score the 19 indicators in Table 1 according to ISM theory (the relationship between the factors is weighted, and the threshold value is 0.5), where "1" means that there is a relationship between the corresponding ranks, and "0" is the opposite. The adjacency matrix as shown in Table 2:

ISM Calculation and Analysis
Based on SPSSPRO, bring in the adjacency matrix TABLE 2 constructed in the previous section, calculate the reachability matrix in TABLE 3, and use this to obtain the inter-factor relationship to derive the hierarchical grading results of factors, as shown in TABLE 4, after which the corresponding ISM relationship diagram is drawn according to the hierarchical relationship, as shown in FIGURE 1. According to the ISM structure diagram obtained from the above decomposition results, the factors affecting financial fraud can finally be divided into 3 layers, which are surface layer L 1 and L 2 , intermediate layer L 3 and bottom layer L 4 , L 5 and L 6 . Surface factors: This category directly affects corporate financial fraud and is the first factor companies focus on when preventing financial fraud. As can be seen from Figure 1, a total of 2 layers of 6 factors are included. The influencing factors located in the first layer 1 are profits and taxes mismatch, product unit price is much higher than the industry average price, non-current assets are inconsistent with the development of industry operation, abnormality between operating conditions and industry environment, and unrealistic flow turnover rate. If the company's development is not aligned with reality, it is directly related to financial fraud. The second element is that the listed company is demanding and involved in a betting agreement. To achieve difficult goals, companies often commit financial fraud to solve this problem. Intermediate factors: This category of factors can be influenced by both the surface and bottom factors. As seen in Figure 1, a total of 6 factors are included in layer 1. The elements in this layer include income and long-term asset variation, abnormal sales or project completion cycle, high shareholder equity pledge, improper combination of financial statement, abnormal related party transactions, and secret relationship between customers and suppliers. These indirect cause trigger financial fraud, such as abnormal business cycles that can lead to revenue. The interaction between such factors may change the operation of the company, in order to present a good development, the company may whitewash financial statements in such situations, thus indirectly causing financial fraud. Bottom factors: These factors are often not easily detected due to their small influence and low correlation between elements. However, focusing on these factors can effectively reduce the influence of intermediate and surface factors on corporate financial fraud. As can be seen from Figure 1, a total of 7 factors in 3 layers are included. However, such factors are not directly linked to financial fraud. Excessive managerial power will lead to an imperfect internal control system because top management can provide conditions for favoritism by interfering with the change of accounting firm, which in turn can cause results such as borrowing interest capitalization by falsifying statement records. It may also take advantage of the changes in the shareholding ratio of major shareholders to change the nature of the business and thus adopt different accounting policies to modify the financial situation, resulting in the consequences of abnormal long-term asset values. Although not directly linked to corporate financial fraud, this layer of factors will threaten the prevention of fraud if they are not attended to. The influential factors in this area are X 17 , X 11 , X 19 , X 14 , X 3 , X 4 , and X 15 . Its influence is wide and not easily influenced by other factors; if the problems in this quadrant can be better solved, it will prevent other factors from leading to corporate financial fraud. For example, an inadequate internal control system will lead to frequent changes in accounting policies, and artificial manipulation of prices makes the unit price of products much higher than the average industry price. Among the stronger drivers is the variation of the shareholding ratio of the major shareholder, and the excessive power of the management, indicating that they play a central driving role in the system. b) Dependent quadrant: This quadrant is located in the second quadrant of the figure. The influencing factors of this quadrant are X 10 , X 5 , X 13 , X 7 and X 8 , which are in the upper layer of the ISM model. Such factors have a lower driving force and higher dependence. The occurrence of factors is related to whether other factors are controlled. Suppose the non-current assets are inconsistent with the industry's business development. In that case, the operating conditions are abnormal with the industry's overall environment, and there is a high pledge of shareholder equity. The product's unit price is much higher than the average industry price. These factors are greatly affected by other factors. c) Linkage quadrant: This quadrant is located in the third quadrant of the graph, the indicators in this quadrant are more dependent and driven, and it is a high dependency-high driver factor area, this area includes X 1 ,X 6 .X 9 ,X 16 ,X 18 .The 5 factors in this region are located in the hierarchical hierarchy diagram, which is not inherently stable, but plays a role in the structure to transmit the influence of the lower factors to the upper levels.From the perspective of interpretative structural modeling and reality: if the period of operating cycle is abnormal, it may use the enterprise project to fake the enterprise sales return and increase the enterprise turnover, and through upstream and downstream collusion fraud to falsify the actual operation of the enterprise, which may lead to the profit and tax expense .This may lead to a mismatch between profits and taxes, and high product unit prices. Thus, the 5 factors in the linkage quadrant play an important role in financial fraud, and we should pay attention to the control of such factors when solving the financial fraud. d) Independent quadrant: This quadrant is located in the fourth quadrant of the figure. The influencing factors of this quadrant are X 2 , X 12 . Compared with other factors, these 2 dependencies and driving forces are small, and there is no significant gap between the two. The improper merger of financial statements will affect the inconsistency between non-current assets and industry business development and the abnormality between business status and industry environment; excessive management power and frequent replacement of accounting firms will affect the mismatch between profits and taxes. The relationship between this quadrant and other factors is simple, which can directly affect corporate financial fraud. Targeted risk control strategies should be proposed.

Conclusion
Strengthen the review of corporate financial statements. Tampering with statement information is one of the most likely causes of corporate financial fraud. For this reason, through a combination of internal and external audits, we should strengthen the daily review of information in the statements,, analyze whether there is any distortion of information, to enhance the authenticity and credibility of the statements and reduce the possibility of corporate fraud. Avoid improper connections between companies and suppliers or manufacturers. Unusual connected transactions may become a trigger for financial fraud. In this regard, we can reduce the probability of financial fraud by fully disclosing the affiliation between enterprises and reducing their hidden relationships, and strengthening the establishment of the conduct system in the industry. Establish an effective internal operation mechanism. An inadequate internal control system is the root cause of corporate fraud. Senior personnel may use their privileges for personal gain to whitewash financial statements through various behaviors. So, financial fraud can be reduced at the source by improving corporate governance and using institutional monitoring, maintaining the independence of internal control, and optimizing the management team.