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(1)
1 =
i
j
L
B
means that the class
j
B contains only
i
L , 0 =
i
j
L
B
means that
j
B does not contain
i
L , and
1 0 < <
i
j
L
B
means that
i
L appears on
j
B with the
dominant ratio
i
j
L
B
.
The dominant degrees are introduced because a business
class may have several different groups, and each group
has different degrees of importance in each class. The
sum in Eq.(1) equals 1, that means the maximum belief
degree of a business group in a business class is 1. This
sum is also a constraint to eliminate that auditors freely
express the dominant degree in their own view.
- ] 1 , 0 [ e
i
L
F
: the ratio of business activities from
i
L
and all business activities done by the inspected firm
F . 1 =
i
L
F
means that firm F only has business
activities in
i
L , 0 =
i
L
F
means that firm F has no
activities in
i
L , and 1 0 < <
i
L
F
means that firm F
has more activities than
i
L and the activities in
i
L
take a ratio expressed by
i
L
F
.
i
L
F
also satisfies the
following constraint:
_ =
=
n
i
L
F
i
1
1
(2)
A firm F has business activities in n groups
} ,..., , {
2 1
F
n
F F F
L L L L = . Each activity
F
i
L done by firm F
has a ratio
i
j
L
B
in class
j
B . The degree to which firm F
belongs to
j
B is determined by the following rule:
j
F
n
F
B F
L L
F
to belongs THEN
and...and
are firm of activities busines IF
1
(3)
B. Classification Inference Process
First, the certainty ratio of business activities
F
i
L done by
firm F in class
j
B is evaluated as follows:
,... 1 , m j
i
j
i
j
F
i
L
B
L
F
B
L
= =
(4)
is a norm t operator.
Then, the certainty value of all business activities
F
L done
by firm F in class
j
B is calculated:
1
j
F
i
j
B
L
n
i
B
F
=
=
(5)
is a conorm t operator.
Finally, the system finds a business class
x
B that has the
maximum value
x
B
F
among m classes:
max
)
`
= =
j y
B
F
j
B
F y x
B B
(6)
IV. NEURAL NETWORKS ANDTAXFRAUD
DETECTION
A. NN and Finance Applications
NNs are a powerful technique to help finance experts to
analyze, model and make sense of complex business data [14 -
17,20]. They enable intelligent systems to learn from
experience, examples and finance records, improving the
performance of the systems over time. Based on typical sample
finance reports and knowledge from experienced finance
experts and inspectors, NNs can generalize finance rules as
well as relations among markets, sales and profits. After
training, NNs can give reasonable advice about the likely tax
fraud status of a new firm in accordance with the periodical
finance report of the firm and its market information. Fig. 2
illustrates steps to apply NNs into decision making applications
in finance.
B. Finance Data for NN
An important point in the feature extraction step is to select
the right sets of input and output features. Raw data are finance
reports of firms, market and business information of business
classes, and experience of inspectors. Features should be
reasonably chosen so that NN can well generalize relations in
the training data, and from a trained NN we can get suitable
conclusions about tax fraud of a new firm based on its market
information and periodical finance reports.
1-4244-0569-6/06/$20.00 2006 IEEE
404
1) Raw data
Raw data on finance reports are monetary values, ranging
from a small value, for example deducted VAT, to a large
number, for example Sum of sales and services. Depending
on the sale scale, values of a criterion on finance reports of
different firms may have big differences.
Raw data about market and business history is in the form
of responses, percentages and numbers which also have wide
ranges. The conclusion of inspection process is Yes that
means the firm is likely to have committed tax fraud, and No
that means the firm is not likely to have committed tax fraud.
1 H
1
j
n
l H
1 I
m I
i I j H
ij w
1 O
ij w k O
p O
rules market and Finance -
n Informatio mic Socioecono -
Reports Finance -
Experts Finance of s Experience -
Data Training
Extraction Feature
Vectors Feature
Decisions
Network Neural
Figure 2. Neural Networks for decision making applications in finance
2) Data Normalization
Architectures of NNs widely used are Multi-Layer
Perceptron Neural Network (MLP NN) and Radial Basis
Function Neural Network (RBF NN). For a good
generalization, input and output values should be normalized.
Because ofthe large ranges of values in the finance reports, if
we normalize amounts of money for items in these reports into
[0,1] using the maximum value as a standard, some small but
important values may be close to 0, for example Other
incomes, or Interest costs, some values may close to each
other, for example Sum of plain sales and services and
Prime cost, and some other values may be close to 1, for
example Source of capital and Sum of assets.
To avoid the above problem in the data normalization on
the finance reports, to make outstanding for each item, we use
some important criteria for standards and use ratios of other
criterions comparing with these standards. The ratio features
from finance reports are described in table 3.
Features from the table of market and history of business
activities have Boolean values: Yes (true, coded by 1) and No
(false, coded by 0). The other percentages have values in [0,1],
so they are unchanged in the training data. The number of
employees ranges from the minimum number
min
E to the
maximum
max
E (normally 5
min
= E and 80
max
= E for a
small business). We code the number in fuzzy membership
values. The membership value
E
F
of the number of
employees
F
E in firm F is calculated as
min max
min
E E
E E
F E
F
=
(7)
TABLE III. RATIO FEATURES FROM FINANCE REPORTS.
1
S = Sum of sales and services
1
C = Prime cost
1
P = Profits from sales and services
1
M = Management cost
2
P = Sum of profits before tax
No. Ratio Features
1
1
S = Sum of sales and services
2
Deducted expenditure/
1
S
3
Sum of plain sales and services/
1
S
4
1 1
/ S C
5
1 1
/ S P
6
Sales from finance activities/
1
P
7
Finance cost/
1
P
8
Interest cost/
1
P
9
Selling cost/
1
C
10
1 1
/ C M
11
Plain profits from sales/
1
S
12
Other incomes/
1
M
13
Other costs/
1
M
14
Other profits/
1
M
15
1 2
/ S P
16
Firms income tax/
2
P
17
Sum of profits after tax/
2
P
18
Welfare budget/
1
S
19
Sum of assets/
1
S
20
Source of capital/
1
S
V. IMPLEMENTATION
The small businesses were selected are firms that have sales
lower than 10 billion VND (equivalent to 700,000 USD) per
year. The number of business groups is 80 = k . The dominant
1-4244-0569-6/06/$20.00 2006 IEEE
405
degree
i
j
L
B
of business group
i
L in business class
j
B is
evaluated by experienced auditors via a survey in advance. The
ratio of business activities
i
L
F
from
i
L with all business
activities done by the inspected firm F is evaluated by
inspectors in the inspection process. The multiplication and
addition are chosen as the norm t and conorm t
operations in Eqs. (4) and (5).
There are 12 = m NNs corresponding to 12 business
classes. Each NN has 3 layers as shown in Fig. 4. Inputs to the
NN are 20 features from finance reports and 9 features from
market and business information, and one output that have
value 1, meaning the inspected firm has committed tax fraud,
and 0 that means the firm has not committed tax fraud. In the
testing data, since the output of NN has values in [0,1], first a
threshold for deciding whether the firm has committed fraud or
not is chosen as 0.5. Depending on the training data in each
business class, this threshold can be changed.
By experiment, the number of neurons in the hidden layer
is chosen as the third of number of inputs. NNs are back-
propagation MLP NNs adopting sigmoid or hyperbolic tangent
activated functions. To accelerated training, adaptive learning
and momentum term are also used. Fig. 3 shows one NN in the
inspection procedure.
1
H
1
l
H
O
1
I
m
I
i
I
j
H
jk
w
ij
w
reports finance
from Features
n informatio business
from Features
(Yes/No) status fraud
tax of Conclusion
Figure 3. One NN in the inspection procedure
VI. EVALUATIONS
Combining fuzzy inference and NNs provides a more
powerful and effective DSS with reasoning and generalizing
capabilities for evaluating fraud status in periodical finance
reports.
The rule (3), together with Eqs. (4), (5) and constraints (1)
and (2), is equivalent to the following fuzzy rule:
j
n
j j
B
F j
L
B
F
n
L
B
F
B F
L L
F
certainty with to belongs THEN
) is ( and...and ) is (
are firm of activities business of ratios the IF
1
1
(8)
A DSS using rule form (8) may need thousands of
inference rules with many combinations of ratios in premises.
Not only do they take lots of time for developers but also much
effort for experienced auditors to revise all of the rules. Our
model uses only m rules (3) with Eqs. (1), (2), (4) and (5).
After inference, the system shows a graph of membership
degrees of firm F in m classes. Experienced auditors also
confirmed that it was easy to review the knowledge presented
by the rules, and easy to understand inference results via the
membership graph. Fig. 4 shows an example of the graph. In
this graph, the inspected firm F belongs to the class
9
B
because most of its business activities are in the business class
9
B ( 52 . 0
9
=
B
F
).
Figure 4. A graph of membership degrees of a firm in 12 classes
Relations of data may have a big difference when sample
finance reports are collected from both large and small sale
firms, or gathered from firms in different business classes. NNs
learned the training data better if we classify business activities
and scales into classes and use one NN for one business class
that has similar business activities.
As opposed to errors or mistakes, tax fraud is not due to
accident. Some firms try to make it reasonable when
submitting the finance reports, and fraud is hidden
intentionally. The NNs may not efficiently discover the hidden
fraud if we only use features selected from the periodical
finance reports. NNs would better generalize the data and more
effectively classify fraud and non-fraud firms when we use
training features extracted from business activities and firm
information, together with the finance reports.
In the first phase, we use real data from 13 non-fraud firms
and 20 fraud firms in heavy industrial services class as the
training data of a NN. The number of training datasets is 24,
including 9 datasets from non-fraud firms and 15 datasets from
fraud firms, and the number of testing data is 9, including 4
datasets from non-fraud firms and 5 datasets from fraud firms.
The sigmoid function is chosen as the activated function of the
NN. After 2000 iterations, the NN leant the data with an
accuracy of
1
10 2