Benford's Law Verification on Local Government Financial Statements

This study investigates the conformity to Benford’s Law of the information disclosed in financial statements. Using the first digit test of Benford’s Law, the study analyses the reliability of financial information provided by listed companies on an emerging capital market before and after the implementation of International Financial Reporting Standards (IFRS). The results of the study confirm the increase of reliability on the information disclosed in the financial statements after IFRS implementation. The study contributes to the existing literature by bringing new insights into the types of financial information that do not comply with Benford’s Law such as the amounts determined by estimates or by applying professional judgment.

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Reading Russian Tea Leaves: Assessing the Quality of Bank Financial Statements with the Benford Distribution

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091516500211 ◽

2016 ◽

Vol 19 (04) ◽

pp. 1650021 ◽

Cited By ~ 1

Author(s):

Denis Davydov ◽

Steve Swidler

Keyword(s):

Reporting Quality ◽

Financial Statements ◽

Benford’S Law ◽

Bank Failures ◽

Recent Experience ◽

Net Income ◽

Balance Sheets ◽

Detection Algorithms ◽

Benford's Law

Benford’s Law, a rule concerning first digits of an array of numbers, has frequently been used to test for the reporting quality of financial statements. When applied to the recent experience for Russian banks, one conclusion is that the 2004 regime shift in accounting standards produced higher quality financial statements. Prior to 2004, the Benford evidence suggests that Russian banks tended to round revenues up, expenses down and thus overstate net income. It also appears that banks may have presented stronger balance sheets than warranted. In the second part of the analysis, the practical use of Benford’s Law to discern a looming bank failure appears limited. While there is, perhaps, some beneficial information to be drawn from testing for Benford distribution conformity, in isolation the tests for financial statement manipulation are inconclusive. Instead, Benford might be used with other early warning detection algorithms to recognize impending bank failures.

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Audit Quality Inputs and Financial Statement Conformity to Benford’s Law

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x20930467 ◽

2020 ◽

pp. 0148558X2093046

Author(s):

Thien Le ◽

Gerald J. Lobo

Keyword(s):

Cash Flow ◽

Audit Quality ◽

Financial Statements ◽

Audit Fees ◽

Financial Statement ◽

Benford’S Law ◽

Audit Report ◽

Audit Firm ◽

Income Statement ◽

Benford's Law

We examine whether audit quality inputs are related to the conformity of financial statements to Benford’s law. We find that overall financial statement conformity increases with audit fees, nonaudit fees, and audit report lag, and decreases with audit firm tenure. We also find that these audit quality inputs are more strongly associated with income statement conformity than with cash flow statement conformity. Our findings document the role that auditing plays in enhancing the conformity of financial statements to Benford’s law.

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Predictability of financial statements fraud-risk using Benford’s Law

Cogent Economics & Finance ◽

10.1080/23322039.2021.1889756 ◽

2021 ◽

Vol 9 (1) ◽

pp. 1889756

Author(s):

Mehdi Rad ◽

Ali Amiri ◽

Mohammad Hussein Ranjbar ◽

Hojatollah Salari

Keyword(s):

Financial Statements ◽

Benford’S Law ◽

Fraud Risk ◽

Benford's Law

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Benford’s Law in Forensic Analysis of Income Statements of Economic Entities in Bosnia and Herzegovina

10.15179/ces.23.1.2 ◽

2021 ◽

Vol 23 (1) ◽

pp. 31-61

Author(s):

Ševala Isaković-Kaplan ◽

◽

Lejla Demirović ◽

Mahir Proho ◽

◽

...

Keyword(s):

Bosnia And Herzegovina ◽

Financial Statements ◽

Forensic Analysis ◽

Financial Statement ◽

Benford’S Law ◽

Business Decisions ◽

Full Disclosure ◽

Wide Range ◽

Benford's Law ◽

And Performance

The objective of preparing and presenting financial statements is to provide information about the financial position and performance of an entity, which is useful to a wide range of users of financial statements for business decisions. If information presented in the financial statements is not full disclosure and/or is incorrect, the presented image of the business entity will be wrong, as well as business decisions made on the basis of such financial statements. Unfortunately, many entities knowingly manipulate revenues and expenses to manage earnings in a way that suits the entity management. Detecting frauds in financial statements is the primary task of forensic accountants. This paper analyzes the possibilities of applying Benford’s law in the forensic analysis of income statements of economic entities in Bosnia and Herzegovina, to detect possible earnings manipulation. The results of the research confirm that the positions of revenues and expenses in the income statements of economic entities in Bosnia and Herzegovina generally follow Benford’s law, but also stress the need to increase attention and conduct additional forensic investigations for certain items as indicators of financial statement manipulation.

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The empirical analysis of financial reports of companies in Croatia: Benford distribution curve as a benchmark for first digits

Croatian Review of Economic Business and Social Statistics ◽

10.2478/crebss-2019-0014 ◽

2019 ◽

Vol 5 (2) ◽

pp. 90-100

Author(s):

Ivana Cunjak Mataković

Keyword(s):

Distribution Curve ◽

Stock Exchange ◽

Financial Statements ◽

Benford’S Law ◽

Chi Square ◽

Financial Reports ◽

Benford's Law ◽

Chi Square Test ◽

Kolmogorov Smirnov ◽

The Empirical Analysis

AbstractThe financial numbers game is unfortunately alive and doing well. One of the forensic accounting techniques is based on Benford’s Law and is used for the detection of unusual transactions, anomalies or trends. The aim of this paper is to test whether the financial statements of Croatian companies deviate from Benford’s Law distribution. The financial statements of 24 companies that are in the pre-bankruptcy settlement process and 24 companies that are not in the pre-bankruptcy settlement process were analysed using the Benford’s Law test of the first digit distribution for the period from 2015 to 2018. The data used to calculate the first digits of distribution were taken from the Zagreb Stock Exchange. The chi-square test has shown that the observed companies that are not in the process of pre-bankruptcy settlement do not have the first digit distribution which follows the Benford’s Law distribution. The Kolmogorov-Smirnov Z test has shown that the distribution of the first digits from the financial statements of companies listed on the Zagreb Stock Exchange fits to Benford’s Law distribution.

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Do the Financial Statements of Listed Companies on the Ljubljana Stock Exchange Pass the Benford’s Law Test?

International Business Research ◽

10.5539/ibr.v12n1p54 ◽

2018 ◽

Vol 12 (1) ◽

pp. 54

Author(s):

Natasa Omerzu ◽

Iztok Kolar

Keyword(s):

Stock Exchange ◽

Financial Statements ◽

Listed Companies ◽

Financial Data ◽

Theoretical Distribution ◽

Benford’S Law ◽

Digital Analysis ◽

Accounting Data ◽

Benford's Law ◽

Long Time

Currently, we need to think about the risks in using the financial statements. Abroad, for a long time, in the detection of irregularities in the financial statements, Benford's law test has been used, which is a very simple, objective and efficient digital analysis that can help identify controversial areas. Since, in Slovenia, its use is still unknown and in practice, and it is rarely used, we checked whether the financial statements of Slovenian companies listed on the Ljubljana Stock Exchange pass the Benford’s law test. Our study is original, as no one has ever tested the company's financial statements on the Ljubljana Stock Exchange with this test. We found that the tested data very well matched the theoretical distribution according to Benford's law. If the deviation of the analysed data from the theoretical distribution is very large, this does not mean that this is a possible fraud in the used financial data. Benford's law helps us identify the controversial areas that require our attention and the decision on how to proceed with the audit or possible investigation of accounting data.

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APLIKASI HUKUM BENFORD DALAM MENGANALISA KASUS GARUDA INDONESIA

Jurnal Akuntansi Bisnis ◽

10.30813/jab.v13i2.2240 ◽

2020 ◽

Vol 13 (2) ◽

Author(s):

Theresia Hesti Bwarleling

Keyword(s):

Distribution Pattern ◽

Financial Statements ◽

Benford’S Law ◽

Average Absolute Deviation ◽

Absolute Deviation ◽

Audit Planning ◽

Benford's Law ◽

Benford Law

ABSTRACT: Benford's Law is a simple and effective tool in finding fraud for an auditor. The purpose of this study was to determine whether Benford's Law can be used effectively in analyzing the indication of ambiguity in the financial statements of PT. Garuda Indonesia (Persero) Tbk. 2018. To answer this question, this research uses all accounts in the company's financial statements from 2018 and 2017. In assessing whether these accounts have differences in distribution with Benford's Law, this study uses the average absolute deviation. Then the predicted absolute deviation results are tested by referring to the exposure of Garuda's incidental publications (July, 2019). The results of this study indicate that the value of the financial statements of PT. Garuda Indonesia (Persero) Tbk. in the year 2018 fulfills the Benford Law distribution pattern. Meanwhile, in 2017 there were several deviant account values which were then asked to be restated in the 2018 reporting. Benford's law has once again proven to be used as an effective tool in audit planning.Keywords: Benford Law, Garuda Indonesia Financial Statements, Average Absolute Deviation ABSTRAK: Hukum Benford merupakan alat bantu yang sederhana dan efektif dalam menemukan kecurangan bagi seorang auditor. Tujuan dari penelitian ini adalah untuk mengetahui apakah Hukum Benford dapat digunakan secara efektif dalam menganalisa adanya indikasi kerancuan Laporan Keuangan PT. <a href="https://www.cnnindonesia.com/tag/garuda-indonesia">Garuda Indonesia</a> (Persero) Tbk. Tahun 2018. Untuk menjawab pertanyaan tersebut, riset ini menggunakan seluruh akun dalam laporan keuangan perusahaan tahun 2018 dan 2017. Dalam menilai apakah akun-akun tersebut memiliki perbedaan distribusi dengan Hukum Benford, penelitian ini menggunakan rata-rata deviasi absolut. Kemudian hasil rata-rata deviasi absolut diuji prediksinya dengan merujuk pada paparan publikasi insidentil Garuda (Juli, 2019). Hasil dari penelitian ini menunjukkan bahwa nilai akun Laporan Keuangan PT. <a href="https://www.cnnindonesia.com/tag/garuda-indonesia">Garuda Indonesia</a> (Persero) Tbk. Tahun 2018 memenuhi pola distribusi Hukum Benford. Sedangkan pada tahun 2017 terdapat beberapa nilai akun yang menyimpang dan kemudian diminta untuk disajikan ulang di pelaporan tahun 2018. Hukum Benford sekali lagi terbukti dapat digunakan sebagai alat bantu yang efektif dalam perencanaan audit.Kata Kunci: Hukum Benford, Laporan Keuangan <a href="https://www.cnnindonesia.com/tag/garuda-indonesia">Garuda Indonesia</a>, Rata-rata Deviasi Absolut

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Fraud Detection in Financial Statements Applying Benford's Law with Monte Carlo Simulation

Acta Oeconomica ◽

10.1556/032.2019.69.2.4 ◽

2019 ◽

Vol 69 (2) ◽

pp. 217-239

Author(s):

Vladan Pavlović ◽

Goranka Knežević ◽

Marijana Joksimović ◽

Dušan Joksimović

Keyword(s):

Monte Carlo Simulation ◽

Monte Carlo ◽

Frequency Distribution ◽

High Probability ◽

Financial Statements ◽

Financial Statement ◽

Benford’S Law ◽

Financial Reports ◽

Benford's Law ◽

Very High

Benford's Law is a useful tool for detecting fraud in financial statements. In this paper we test the financial item named ‘Work performed by the undertaking for its own purpose and capitalised’ applying this tool. The data are taken from the financial reports of all companies submitted to the Serbian Business Register Agency for the period of 2008–2013. Our conclusion shows that there is a very high probability that the frequency distribution of the second digit does not satisfy Benford's Law. In other words, it implies that certain manipulations have been usually done with the second digit of the aforementioned item in the financial statement. This research confirms our hypothesis that financial statement frauds are usually conducted using the second digit.

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Forensic Auditing Tools in Detecting Financial Statements' Irregularities

Organizational Auditing and Assurance in the Digital Age - Advances in Finance, Accounting, and Economics ◽

10.4018/978-1-5225-7356-2.ch013 ◽

2019 ◽

pp. 256-275 ◽

Cited By ~ 1

Author(s):

Radiah Othman ◽

Rashid Ameer ◽

Fawzi Laswad

Keyword(s):

Balance Sheet ◽

Financial Statements ◽

Benford’S Law ◽

Total Current ◽

Audit Planning ◽

Income Statement ◽

Benford's Law ◽

Sampling Procedures ◽

Benford Law

This chapter illustrates a three-stage analytical procedure to examine and detect the likelihood of financial statements manipulation and identify the accounts that were manipulated by Toshiba. It applies the Beneish model and Benford's law to Toshiba's balance sheet and income statement from 2002 to 2016. The results show significant deviation from Benford's law in the pre-fraud period in equity, long-term receivables and property, plant and equipment, long-term liabilities, and in the post-fraud period in the long-term liabilities, equity, long-term receivables, and total current assets. The results provide evidence of the usefulness of Beneish and Benford law as forensic auditing tools for detecting financial statements' irregularities and fraud that would be useful for the audit planning and sampling procedures.

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