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

Author

Listed:
  • Vladan Pavlović

    (Faculty of Economics, University of Pristina (Kosovska Mitrovica), Serbia)

  • Goranka Knežević

    (Singidunum University, Belgrade, Serbia)

  • Marijana Joksimović

    (Megatrend University, Belgrade, Serbia)

  • Dušan Joksimović

    (Academy of Criminal Investigation and Police Studies, Belgrade, Serbia)

Abstract

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.

Suggested Citation

  • Vladan Pavlović & Goranka Knežević & Marijana Joksimović & Dušan Joksimović, 2019. "Fraud Detection in Financial Statements Applying Benford’s Law with Monte Carlo Simulation," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 69(2), pages 217-239, June.
    • Handle: RePEc:aka:aoecon:v:69:y:2019:i:2:p:217-239
    Note: This paper is a part of the results of the Research Project No. 179001 and Project III 45003 supported by the Ministry of Education, Science and Technological Development of the Republic of Serbia.
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    Cited by:

    1. Bouchetara, Mehdi & Nassour, Abdelkader, 2020. "Internal Auditing In The Face Of Banking Fraud, Application Of The Benford Law On Algerian Private Bank," UTMS Journal of Economics, University of Tourism and Management, Skopje, Macedonia, vol. 11(2), pages 108-120.

    More about this item

    Keywords

    Benford’s Law; income statement; auditing; financial fraud; Monte Carlo simulation;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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