Financial Fraud Detection and Prediction in Listed Companies Using SMOTE and Machine Learning Algorithms

Abstract

This paper proposes a new method that can identify and predict financial fraud among listed companies based on machine learning. We collected 18,060 transactions and 363 indicators of finance, including 362 financial variables and a class variable. Then, we eliminated 9 indicators which were not related to financial fraud and processed the missing values. After that, we extracted 13 indicators from 353 indicators which have a big impact on financial fraud based on multiple feature selection models and the frequency of occurrence of features in all algorithms. Then, we established five single classification models and three ensemble models for the prediction of financial fraud records of listed companies, including LR, RF, XGBOOST, SVM, and DT and ensemble models with a voting classifier. Finally, we chose the optimal single model from five machine learning algorithms and the best ensemble model among all hybrid models. In choosing the model parameter, optimal parameters were selected by using the grid search method and comparing several evaluation metrics of models. The results determined the accuracy of the optimal single model to be in a range from 97% to 99%, and that of the ensemble models as higher than 99%. This shows that the optimal ensemble model performs well and can efficiently predict and detect fraudulent activity of companies. Thus, a hybrid model which combines a logistic regression model with an XGBOOST model is the best among all models. In the future, it will not only be able to predict fraudulent behavior in company management but also reduce the burden of doing so.