scholarly journals Detecting earnings management using Benford’s Law: the case of Romanian listed companies

2019 ◽  
Vol 18 (2) ◽  
pp. 198-223 ◽  
Author(s):  
Costel Istrate ◽  
Keyword(s):  
Earnings Management ◽  
Listed Companies ◽  
Benford’S Law ◽  
Benford's Law

scholarly journals THE LINK BETWEEN EARNINGS MANAGEMENT AND DIGITAL PATTERN / O elo entre gerenciamento de resultado e padrão digital

2014 ◽  
Vol 14 (1) ◽  
pp. 351
Author(s):  
Jennifer Martínez Ferrero ◽  
Beatriz Cuadrado Ballesteros ◽  
Marco Antonio Figueiredo Milani Filho
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Poor Quality ◽  
Financial Data ◽  
Benford’S Law ◽  
Similar Distribution ◽  
Data Set ◽  
Benford's Law ◽  
High Degree

<p>According to Dechow and Dichev (2002) and Lin and Wu (2014), a high degree of earnings management (EM) is associated with a poor quality of information. In this sense, it is possible to assume that the financial data of companies that manage earnings can present different patterns from those with low degree of EM. The aim of this exploratory study is to test whether a financial data set (operating expenses) of companies with high degree of EM presents bias. For this analysis, we used the model of Kothari and the modified model of Jones (“Dechow model” hereafter) to estimate the degree of EM, and we used the logarithmic distribution of data predicted by the Benford’s Law to detect abnormal patterns of digits in number sets. The sample was composed of 845 international listed non-financial companies for the year 2010. To analyze the discrepancies between the actual and expected frequencies of the significant-digit, two statistics were calculated: Z-test and Pearson’s chi-square test. The results show that, with a confidence level of 90%, the companies with a high degree of EM according to the Kothari model presented similar distribution to that one predicted by the Benford’s Law, suggesting that, in a preliminary analysis, their financial data are free from bias. On the other hand, the data set of the organizations that manage earnings according to the Dechow model presented abnormal patterns. The Benford´s Law has been implemented to successfully detect manipulated data. These results offer insights into the interactions between EM and patterns of financial data, and stimulate new comparative studies about the accuracy of models to estimate EM.</p><p>Keywords:<strong> </strong>Earnings management (EM). Financial Reporting Quality (FRQ). Benford’s Law.</p>

scholarly journals Applying Benford’s Law to Examine the Quality of Reported Income Numbers of Unlisted Firms

2015 ◽  
Vol 7 (12) ◽  
pp. 211
Author(s):  
Sudershan Kuntluru ◽  
Rachappa Shette ◽  
Achalapathi K.V.
Keyword(s):  
Scenario Analysis ◽  
Listed Companies ◽  
Benford’S Law ◽  
Annual Income ◽  
Empirical Results ◽  
Benford's Law ◽  
Unlisted Firms ◽  
Reported Income

<p>The present study makes an attempt to examine the quality of reported income numbers of unlisted firms in India. The Benford’s Law is applied to examine the digital occurrence of reported income numbers of unlisted firms. The analysis is based on 43,996 reported annual income numbers of 22,147 sample firms during the financial years from 2000-01 to 2011-12. Further, the results are analyzed under four different scenarios viz., ownership, size, age and nature of industry. The empirical results show that the observed proportionate occurrence of zero is significantly less than the expected proportionate occurrence. These results are contrary to the findings of the related studies of listed companies. The results indicate lower quality of reported income numbers of unlisted firms. Based on the scenario analysis, the empirical results indicate that the proportionate occurrence of second single digits of state-owned unlisted firms confirm the Benford’s Law. The present study contributes to the literature by examining the quality of reported income numbers of unlisted firms using the Benford’s Law.</p>

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

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&#39;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&rsquo;s law test. Our study is original, as no one has ever tested the company&#39;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&#39;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&#39;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.

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.

Sign in / Sign up

Export Citation Format

Share Document