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Applying Benford’s law to detect earnings management

Author

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  • Sylwestrzak Marek

    (Department of Finance and Accounting Faculty of Economic Sciences University of Warsaw, Poland)

Abstract

Aim/purpose – This paper analyzes the role of Benford’s law in the detection of earnings management in Poland. Previous research that uses Benford’s law does not split the sample into a fraud and a control group; however, this method is used in logistic regression and data mining analysis. Design/methodology/approach – The sample comprises 126 observations of Polish non-financial companies listed on the Warsaw Stock Exchange for the years 2010-2021. The author uses first, second, and first-two digits analysis as a proxy for earnings management detection. Findings – The results indicate that fraudulent companies have different deviations in the digits than control firms. Accordingly, the statistical test results indicate that control companies have weaker conformity with the Benford distribution than fraudulent companies. Research implications/limitations – The study sample is limited to 126 observations, which is due to the small number of listed firms that received a monetary fine from the Polish Financial Supervision Authority (UKNF Board) for violation of IAS/IFRS principles related to their financial statements during the study period. Originality/value/contribution – The author offers a significant contribution to the accounting literature by proposing the separation of fraudulent and control observations in Benford analysis due to differences in the deviations of digits. Also, analyzing the full sample may lead to the identification of inappropriate areas for further auditor analysis.

Suggested Citation

  • Sylwestrzak Marek, 2023. "Applying Benford’s law to detect earnings management," Journal of Economics and Management, Sciendo, vol. 45(1), pages 216-236, January.
    • Handle: RePEc:vrs:jecman:v:45:y:2023:i:1:p:216-236:n:7
    DOI: 10.22367/jem.2023.45.10
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    References listed on IDEAS

    as
    1. Alex Ely Kossovsky, 2021. "On the Mistaken Use of the Chi-Square Test in Benford’s Law," Stats, MDPI, vol. 4(2), pages 1-35, May.
    2. Sitsofe Tsagbey & Miguel de Carvalho & Garritt L. Page, 2017. "All Data are Wrong, but Some are Useful? Advocating the Need for Data Auditing," The American Statistician, Taylor & Francis Journals, vol. 71(3), pages 231-235, July.
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    More about this item

    Keywords

    earnings management; digital analysis; Polish companies.;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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