AN APPLICATION OF BENFORD’S LAW TO FUNDAMENTAL ACCOUNTING FIGURES REPORTED BY BORSA ISTANBUL (BIST) COMPANIES

Abstract

The financial reporting of public firms is argued for being subject to manipulation and fraud. Since adherence to this mysterious law is accepted as a sign for the data’s reliability, Benford’s Law has long been used by auditors as a tool to test the integrity of a dataset and to detect fraud. The expected distribution of digits in any set of natural numbers has initially been put forward by Benford (1938). Benford’s law states that probability distribution of digits’ occurrence is not uniform. Smaller digits are found to exist more frequently than the greater ones. This study tested the compliance of fundamental figures reported by Borsa Istanbul (BIST) companies with Benford’s Law, by means of a data between 2005 and 2015 covering 148 companies. According to the different testing approaches utilized, which imparted rather similar results, reported figures of current assets and net sales seemed to be almost in perfect conformity with Benford’s Law. However, the study detected several deviation points in the data of total assets and net profit figures from Benford’s Law. From the results of this study, we cannot conclude that they are extensively manipulative or they are in full conformity with the Benford’s Law. Nevertheless, this study suggests the possible point of interest for further researches. In application of Benford’s Law non-conformity should be evaluated with discretion. The deviations are only a signal to analyze the data further, and should not be seen as a solid proof of fraud or manipulation.

Keywords

• Benford’s Law,Borsa Istanbul,manipulation,fraud

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