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.

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 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.

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 Reliability of Financial Information from the Perspective of Benford’s Law

Entropy ◽  
2021 ◽  
Vol 23 (5) ◽  
pp. 557
Author(s):  
Ionel Jianu ◽  
Iulia Jianu
Keyword(s):  
Financial Reporting ◽  
Capital Market ◽  
Financial Statements ◽  
Financial Information ◽  
Benford’S Law ◽  
Professional Judgment ◽  
Reporting Standards ◽  
Financial Reporting Standards ◽  
Benford's Law ◽  
Before And After

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.

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.

scholarly journals Analysis of Financial Statements

2019 ◽  
Vol 2 (2) ◽  
pp. p17
Author(s):  
Petrit Hasanaj ◽  
Beke Kuqi
Keyword(s):  
Assessment Tool ◽  
Analytical Techniques ◽  
Financial Statements ◽  
Financial Statement ◽  
Actual State ◽  
Financial Reports ◽  
Business Decisions ◽  
Business Analysis ◽  
Operational Activities ◽  
Made In

The main purpose of this study is to determine, forecast and evaluate the best of economic conditions and company’s performance in the future. The other purpose of this study is to analyze the financial statement and than give information for financial managers to make through decisions about their business. The financial statement applies tools, analytical techniques and required methods for business analysis. It is a diagnostic tool for evaluating financing activities, investment activities and operational activities as well as an assessment tool for management decisions and other business decisions. The analysis of financial statements, respectively the analysis of the financial reports are used by managers, shareholders, investors and all other interested parties regarding the company's state. Managers use financial reports to see the situation in which the company stands and then provide information to shareholders, to see how reasonable are the investments made in the company. To potential investors, the analysis of the financial statements of the company is very important, because, first they want to know the actual state of the company and then decide whether to invest or not.

The Influence of Independent Commissioners, Audit Committee and Company Size on the Integrity of Financial Statements

2021 ◽  
Vol 39 (10) ◽  
Author(s):  
Dirvi Surya Abbas ◽  
Tubagus Ismail ◽  
Muhamad Taqi ◽  
Helmi Yazid
Keyword(s):  
Data Analysis ◽  
Audit Committee ◽  
Positive Impact ◽  
Stock Exchange ◽  
Financial Statements ◽  
Financial Statement ◽  
Financial Reports ◽  
Large Corporation ◽  
Internal Auditors ◽  
Chemical Products

The aim of this study would be to see how independence commissioners, internal auditors, and size of the company affect the financial statement reputation of companies listed on the Indonesia Stock Exchange that produce basic industrial and chemical products (IDX). The findings revealed that having an impartial board of commissioners had a substantial positive impact on financial statement transparency, while having an audit committee and a large corporation had no significant impact. Based on the findings of data analysis research, the audit committee cannot boost the accuracy of the company's financial statements, according to this report. Meanwhile, one of the audit committee's responsibilities is to enhance the accuracy of the company's financial reports such that the details in the financial statements remains current and trustworthy. The internal auditors cannot improve the integrity of the company's financial statements based on the results of data analysis testing. In the meantime, one of the internal auditors tasks is to improve the accuracy of the company's financial reports so that the financial statements' details remain current and reliable. The audit committee cannot enhance the credibility of the company's financial statements based on the findings of data analysis research.  

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