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

Year 2016, Volume: 3 Issue: 3, 234 - 243, 30.09.2016

Asli Aybars , Levent Ataunal

https://doi.org/10.17261/Pressacademia.2016321991

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

References

• Alali, F. A., and Romero, S. 2013, “Benford’s Law: Analyzing a Decade of Financial Data”, Journal of Emerging Technologies in Accounting, vol. 10, pp. 1-39.
• Benford, F. 1938, “The Law of Anomalous Numbers”, Proceedings of the American Philosophical Society, vol. 78, no. 4, pp. 551-572.
• Çinko, M. 2014, “Testing Distribution of BIST-100 Returns by Benford Law”, Journal of Economics, Finance and Accounting, vol. 1, issue 3, pp. 184-191.
• Diekmann, A. 2007, “Not the First Digit! Using Benford’s Law to Detect Fraudulent Scientific Data”, Journal of Applied Statistics, vol. 34, no. 3, pp. 321–329.
• Durtschi, C., Hillison W. , and Pacini, C. 2004, “The Effective Use of Benford’s Law to Assist in Detecting Fraud in Accounting Data”, Journal of Forensic Accounting, vol. V., pp. 17-34.
• Engel, S. 2011, “Fact and Fiction in EU-Governmental Economic Data”, German Economic Review, vol. 12, no.3, pp.243-255.
• Gönen, S., and Rasgen, M. 2016, “Hile Denetiminde Benford Yasası: Borsa İstanbul Örneği”, Journal of International Trade, Finance and Logistics, vol.1, no.1, pp. 93-113.
• Grabinski, K. and Paszek, Z. 2013, “Examining the Reliability of Large Financial Datasets Using Benford’s Law”, Ekonomske Teme, vol. 51, no. 3, pp. 515-524.
• Hadani, M., Goranova, M., Khan, R. 2010, “Institutional Investors, Shareholder Activism, and Earnings Management”, Journal of Business Research. Vol. 64, no.12, pp. 1352-1360.
• Hill, T. P. 1988, “Random-Number Guessing and the First Digit Phenomenon”, Psychological Reports, vol. 62, pp. 967-971.
• Koh, P-S. 2007, “Institutional Investor Type, Earnings Management and Benchmark Beaters”, Journal of Accounting and Public Policy. vol. 26, pp. 267-299.
• Liu, A. Z. 2005, “The Role of Financial Analysts and Institutional Investors in the Numbers Game”. Available at SSRN: http://ssrn.com/abstract=705385 or http://dx.doi.org/10.2139/ssrn.705385.
• Newcomb, S. 1881, “Note on the Frequency of Use of the Different Digits in Natural Numbers”, American Journal of Mathematics, vol. 4, no. 1. , pp. 39-40.
• Nigrini, M. J. 1996, “A Taxpayer Compliance Application of Benford’s Law”, The Journal of the American Taxation Association, vol. 18., no. 1, pp. 72-91.
• Nigrini, M. J., Miller, S. J. 2007, “Benford’s Law Applied to Hydrology Data—Results and Relevance to Other Geophysical Data”, Mathematical Geology, vol: 39, pp. 469–490
• Nye, J. And Moul, C. 2007, “The Political Economy of Numbers: On the Application of Benford’s Law to International Macroeconomic Statistics”, The B.E. Journal of Macroeconomics, vol 7, no. 1, Article 17.
• Rauch, B., Göttsche, M., Brahler, G., and Engel, S. 2011, “Fact and Fiction in EU-Governmental Economic Data”, German Economic Review, vol. 12, no. 3, pp. 243–255.
• Slemrod, J. 1985, “An Empirical Test for Tax Evasion”, The Review of Economics and Statistics, vol. 67, no. 2, pp. 232-238.
• Thomas, J. K. 1989, “Unusual Patterns in Reported Earnings”, The Accounting Review, vol. 64, no. 4, pp. 773-787.
• Uzuner, M. T. 2014, “Benford Yasasının Borsa İstanbul’da İşlem Gören Bankaların Konsolide Bilançolarına Uygulanması”, Finansal Araştırmalar ve Çalışmalar Dergisi, vol. 5, no.10, pp. 73-82
• Zahra, S. A., Priem, R. L. and Rasheed, A. A. 2005, “The Antecedents and Consequences of Top Management Fraud”. Journal of Management. vol. 31, no. 6, pp. 803-828.