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What Are You Saying? Using Topic To Detect Financial Misreporting, Nerissa C. Brown, Richard M. Crowley, W. Brooke Elliott
What Are You Saying? Using Topic To Detect Financial Misreporting, Nerissa C. Brown, Richard M. Crowley, W. Brooke Elliott
Research Collection School Of Accountancy
We use a machine learning technique to assess whether the thematic content of financial statement disclosures (labeled topic) is incrementally informative in predicting intentional misreporting. Using a Bayesian topic modeling algorithm, we determine and empirically quantify the topic content of a large collection of 10‐K narratives spanning 1994 to 2012. We find that the algorithm produces a valid set of semantically meaningful topics that predict financial misreporting, based on samples of Securities and Exchange Commission (SEC) enforcement actions (Accounting and Auditing Enforcement Releases [AAERs]) and irregularities identified from financial restatements and 10‐K filing amendments. Our out‐of‐sample tests indicate that topic …