EARNINGS MANAGEMENT AMONG FIRMS DURING THE PRE-SEC ERA: A BENFORD'S LAW ANALYSIS

2011 ◽  
Vol 38 (2) ◽  
pp. 145-170 ◽  
Author(s):  
Jeffrey J. Archambault ◽  
Marie E. Archambault
Keyword(s):  
Financial Statement ◽  
Benford’S Law ◽  
Operating Environment ◽  
Industrial Firms ◽  
Financial Reports ◽  
Rate Regulation ◽  
Time Period ◽  
Benford's Law ◽  
Utility Companies ◽  
Net Assets

ABSTRACT This paper examines the existence of financial statement manipulation in the U.S. during a time period when many of the current motivations did not exist. The study looks for types of manipulations that would be motivated by the pre-SEC operating environment. To examine this issue, a sample of U.S. firms from the 1915 Moody's Analyses of Investments is divided into industrial firms, railroads, and utilities. The railroad and utility companies faced rate regulation during this time period, providing incentives to manipulate the financial reports so as to maximize the rate received. Industrial firms were not regulated. These companies wanted to attract investors, motivating manipulations to increase income and net assets. To determine if manipulations are occurring, a Benford's Law analysis is used. This analysis examines the frequency of numbers in certain positions within an amount to determine if the distribution of the numbers is similar to the pattern documented by Benford's Law. Some manipulations consistent with expectations are found.

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

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.

Abiding by the Law? Using Benford’s Law to Examine the Accuracy of Nonprofit Financial Reports

2019 ◽  
Vol 49 (3) ◽  
pp. 548-570 ◽  
Author(s):  
Heng Qu ◽  
Richard Steinberg ◽  
Ronelle Burger
Keyword(s):  
Statistical Methods ◽  
Organizational Level ◽  
Benford’S Law ◽  
Financial Reports ◽  
Forensic Accounting ◽  
Data Form ◽  
Benford's Law ◽  
Natural Data ◽  
The Individual ◽  
Academic Study

Benford’s Law asserts that the leading digit 1 appears more frequently than 9 in natural data. It has been widely used in forensic accounting and auditing to detect potential fraud, but its application to nonprofit data is limited. As the first academic study that applies Benford’s Law to U.S. nonprofit data (Form 990), we assess its usefulness in prioritizing suspicious filings for further investigation. We find close conformity with Benford’s Law for the whole sample, but at the individual organizational level, 34% of the organizations do not conform. Deviations from Benford’s law are smaller for organizations that are more professional, that report positive fundraising and administration expenses, and that face stronger funder oversight. We suggest improved statistical methods and experiment with a new measure of the extent of deviation from Benford’s Law that has promise as a more discriminating screening metric.

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

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.

scholarly journals An Evaluation of Music’s Adherence to Benford’s Law Throughout History

2021 ◽  
Vol 67 (1) ◽  
pp. 73-84
Author(s):  
Sybil Prince Nelson ◽  
◽  
Brian Wickman ◽  
Jack Null ◽  
Eric Gazin ◽  
...  
Keyword(s):  
Music History ◽  
Western Music ◽  
Benford’S Law ◽  
Large Collection ◽  
Time Period ◽  
Benford's Law ◽  
Post War ◽  
Mathematical Connection

Western Music history can be divided into six major categories: Medieval, Renaissance, Baroque, Classical, Romantic, and Post-War. We analyzed a large collection of music from each time period and discovered a clear mathematical connection. Within each time period, we found that the note frequencies measured in hertz (Hz) and note durations are all Benford distributed. We also found that as music progressed through time, note lengths adhered closer and closer to the Benford distribution with the exception of the Post-War time period.

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

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.

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

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.

scholarly journals Is conditional conservatism a source of deviations of financial statements from Benford's Law?

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Tri Tri Nguyen ◽  
Chau Minh Duong ◽  
Nguyet Thi Minh Nguyen
Keyword(s):  
Financial Distress ◽  
Stock Exchange ◽  
Listed Companies ◽  
Financial Statement ◽  
Benford’S Law ◽  
Assessment Procedure ◽  
Specific Level ◽  
Content Type ◽  
Conditional Conservatism ◽  
Benford's Law

PurposeIn this paper, the authors examine the association between conditional conservatism and deviations of the first digits of financial statement items from what are expected by Benford's Law.Design/methodology/approachThis research uses data of companies listed on the London Stock Exchange. The authors measure deviations of first digits from Benford's Law following Amiram et al. (2015) and firm-year conditional conservatism following previous studies (Basu, 1997; Khan and Watts, 2009; García Lara et al., 2016). The authors use multiple regressions to provide evidence for their hypothesis.FindingsThe results show that conditional conservatism is positively associated with deviations from Benford's Law. The findings are robust across different measures of deviations and conditional conservatism. Also, the authors find that the relationship between deviations from Benford's Law and conditional conservatism is more pronounced for firms with debt issuance, and for leveraged firms facing financial distress. Next, the authors’ analyses confirm previous evidence by showing that the first digits of financial statement items of UK listed companies conform to Benford's Law at the firm-specific level and the market level, and deviations of income statements are larger than those of balance sheets and cash flow statements.Research limitations/implicationsThe research makes significant contributions to the literature. First, this is the first study that provides empirical evidence suggesting that conditional conservatism may be a source of deviations from Benford’s Law. Second, the authors provide evidence confirming previous US findings (e.g. Amiram et al., 2015) showing that the distributions of first digits of financial statement items of UK listed companies also conform to Benford's Law.Practical implicationsThe authors’ findings have implications for auditors. Auditors should be aware of “false positive” for material misstatements when using Benford's Law as a risk assessment procedure. While both conditional conservatism and earnings management are related to deviations from Benford's Law, conservatism-related biases could indicate less audit risks.Originality/valueThe authors provide new and original evidence suggesting that conditional conservatism is related to deviations from Benford's Law.

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