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Johnson, GG (2005)

Financial Sleuthing Using Benford's Law to Analyze Quarterly Data with Various Industry Profiles

Journal of Forensic Accounting 6(2), pp. 293-316.

ISSN/ISBN: Not available at this time. DOI: Not available at this time.

Abstract: Quarterly revenue and earnings per share data from 2001 and 2002 were obtained from CNN’s Money website, Highlight Reports (Highlight Reports n.d.). The data were analyzed using Benford’s digit placement probabilities and Drake and Nigrini’s (2000) mean absolute deviation to ascertain the degree of conformance. Results show general agreement with Benford’s probabilities and support, “close conformity” or “acceptable conformity” for data in both years. Nevertheless, when the digit probabilities are analyzed individually across the three data profiles investigated it is shown that firms tend to “manage” small losses into small gains and/or report smaller negative earnings per share (EPS). Particularly interesting are results associated with the financial and technology sectors. These sectors were selected for special analysis because they were moving in opposite directions financially during the periods examined. By comparing and contrasting the data with the Benford probabilities within each sector, it was determined that management was engaging in data enhancement techniques, to either increase revenues or earnings per share. Specifically, both sectors revealed revenue increases, while the financial sector appears to have “managed” EPS upward and the technology sector “managed” EPS downward. In those instances where the digit placement percentages were not in conformance with Benford, explanations and reasons for the deviations are presented.

@article{, title={Financial Sleuthing Using Benford's Law to Analyze Quarterly Data}, author={Johnson, Gary G}, journal={Journal of Forensic Accounting}, volume={6}, number={2}, year={2005}, }

Reference Type: Journal Article

Subject Area(s): Accounting