Financial statement fraud has been on the increase in the past two decades and includes prominent scandals such as Enron, WorldCom and more recently in South Africa, Steinhoff. These scandals have led to billions of dollars being lost in the form of market capitalisation from different stock exchanges across the world. During this time, there has been an increase in the literature on applying automated methods to detecting financial statement fraud using publicly available data. This paper provides a survey of the literature on automated financial statement fraud detection and identifies current gaps in the literature. The paper highlights a number of important considerations in the implementation of financial statement fraud detection decision support systems, including 1) the definition of fraud, 2) features used for detecting fraud, 3) region of the case study, dataset size and imbalance, 4) algorithms used for detection, 5) approach to feature selection / feature engineering, 6) treatment of missing data, and 7) performance measure used. The current study discusses how these and other implementation factors could be approached within the South African context.

This study explores the potential of utilizing alternative data sources to enhance the accuracy of credit scoring models, compared to relying solely on traditional data sources, such as credit bureau data. A comprehensive dataset from the Home Credit Group’s home loan portfolio is analysed. The research examines the impact of incorporating alternative predictors that are typically overlooked, such as an applicant’s social network default status, regional economic ratings, and local population characteristics. The modelling approach applies the model-X knockoffs framework for systematic variable selection. By including these alternative data sources, the credit scoring models demonstrate improved predictive performance, achieving an area under the curve metric of 0.79360 on the Kaggle Home Credit default risk competition dataset, outperforming models that relied solely on traditional data sources, such as credit bureau data. The findings highlight the significance of leveraging diverse, non-traditional data sources to augment credit risk assessment capabilities and overall model accuracy.

The scandals in publicly listed companies have highlighted the large losses that can result from financial statement fraud and weak corporate governance. Machine learning techniques have been applied to automatically detect financial statement fraud with great success. This work presents the first application of a Bayesian inference approach to the problem of predicting the audit outcomes of financial statements of local government entities using financial ratios. Bayesian logistic regression (BLR) with automatic relevance determination (BLR-ARD) is applied to predict audit outcomes. The benefit of using BLR-ARD, instead of BLR without ARD, is that it allows one to automatically determine which input features are the most relevant for the task at hand, which is a critical aspect to consider when designing decision support systems. This work presents the first implementation of BLR-ARD trained with Separable Shadow Hamiltonian Hybrid Monte Carlo, No-U-Turn sampler, Metropolis Adjusted Langevin Algorithm and Metropolis-Hasting algorithms. Unlike the Gibbs sampling procedure that is typically employed in sampling from ARD models, in this work we jointly sample the parameters and the hyperparameters by putting a log normal prior on the hyperparameters. The analysis also shows that the repairs and maintenance as a percentage of total assets ratio, current ratio, debt to total operating revenue, net operating surplus margin and capital cost to total operating expenditure ratio are the important features when predicting local government audit outcomes using financial ratios. These results could be of use for auditors as focusing on these ratios could potentially speed up the detection of fraudulent behaviour in municipal entities, and improve the speed and quality of the overall audit.

Hamiltonian Monte Carlo is a Markov Chain Monte Carlo method that has been widely applied to numerous posterior inference problems within the machine learning literature. Markov Chain Monte Carlo estimators have higher variance than classical Monte Carlo estimators due to autocorrelations present between the generated samples. In this work we present three new methods for tackling the high variance problem in Hamiltonian Monte Carlo based estimators: 1) We combine antithetic and importance sampling techniques where the importance sampler is based on sampling from a modified or shadow Hamiltonian using Separable Shadow Hamiltonian Hybrid Monte Carlo, 2) We present the antithetic Magnetic Hamiltonian Monte Carlo algorithm that is based on performing antithetic sampling on the Magnetic Hamiltonian Monte Carlo algorithm and 3) We propose the antithetic Magnetic Momentum Hamiltonian Monte Carlo algorithm based on performing antithetic sampling on the Magnetic Momentum Hamiltonian Monte Carlo method. We find that the antithetic Separable Shadow Hamiltonian Hybrid Monte Carlo and antithetic Magnetic Momentum Hamiltonian Monte Carlo algorithms produce effective sample sizes that are higher than antithetic Hamiltonian Monte Carlo on all the benchmark datasets. We further find that antithetic Separable Shadow Hamiltonian Hybrid Monte Carlo and antithetic Magnetic Hamiltonian Monte Carlo produce higher effective sample sizes normalised by execution time in higher dimensions than antithetic Hamiltonian Monte Carlo. In addition, the antithetic versions of all the algorithms have higher effective sample sizes than their non-antithetic counterparts, indicating the usefulness of adding antithetic sampling to Markov Chain Monte Carlo algorithms. The methods are assessed on benchmark datasets using Bayesian logistic regression and Bayesian neural network models.

Good financial management provides economic stability and sustainability to an organization. It enables an organisation to make good use of its resources and plan effectively. South Africa’s public financial management has deteriorated over time, with only 16% of municipalities receiving a clean audit in the 2020-21 financial period as reported by the Auditor General of South Africa. This work aims to find an appropriate model for analysing and predicting audit outcomes for South African municipalities. The data used in the study include 1560 observations of which 55% were unqualified audit opinions. The features used are 13 financial ratios obtained from financial statements from years 2012 to 2018. Feature selection is performed using random forest, correlation analysis and stepwise regression analysis. The performances of three machine learning algorithms are compared; decision tree, artificial neural network (ANN) and logistic regression models. The findings indicate that ANN is the appropriate model for predicting audit opinions in South African municipalities with overall average area under the receiver operating characteristic curve of 0.6918 and overall average area under the Precision–Recall curve of 0.7074 across all feature selection methods. In addition, debt to operating ratio, current ratio and net operating surplus margin are found to be the common three important financial ratios across the various feature selection techniques.

Hamiltonian Monte Carlo (HMC) is a Markov Chain Monte Carlo algorithm that is able to generate distant proposals via the use of Hamiltonian dynamics, which are able to incorporate first-order gradient information about the target posterior. This has driven its rise in popularity in the machine learning community in recent times. It has been shown that making use of the energy-time uncertainty relation from quantum mechanics, one can devise an extension to HMC by allowing the mass matrix to be random with a probability distribution instead of a fixed mass. Furthermore, Magnetic Hamiltonian Monte Carlo (MHMC) has been recently proposed as an extension to HMC and adds a magnetic field to HMC which results in non-canonical dynamics associated with the movement of a particle under a magnetic field. In this work, we utilise the non-canonical dynamics of MHMC while allowing the mass matrix to be random to create the Quantum-Inspired Magnetic Hamiltonian Monte Carlo (QIMHMC) algorithm, which is shown to converge to the correct steady state distribution. Empirical results on a broad class of target posterior distributions show that the proposed method produces better sampling performance than HMC, MHMC and HMC with a random mass matrix.