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Possibility of Benford’s Law Application for Diagnosing Inaccuracy of Financial Statements

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Part of the Studies in Computational Intelligence book series (SCI,volume 1032)

Abstract

The paper describes a technique for diagnosing data inaccuracy using Benford’s law. The Benford distribution for the first significant digit of a random decimal number is presented graphically and mathematically. The main requirements for data are listed, which are consistent with Benford’s law: the data must refer to one process, there must be no maximum and minimum restrictions in the studied population, artificial introduction of the numbering system is not allowed, and there must be no obvious linking patterns between numbers. When examining the possibility of applying Benford’s law to diagnose inaccuracies in the financial statements of an organization, the costs of two companies for payment of services to suppliers were analyzed. It was found that in the absence of attempts to manipulate reporting, performance indicators are close to theoretically predicted based on Benford’s law. Attempts to manipulate reporting are reflected in corresponding deviations from Benford’s law. The possibility of applying Benford’s law to diagnose unreliability of an organization’s financial statements has been proved.

Keywords

  • Benford’s law
  • Distribution
  • Statistics
  • Accounting
  • Financial statements
  • Unreliability
  • Diagnosing inaccuracy

JEL Codes

  • C46
  • H26
  • K42

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  • DOI: 10.1007/978-3-030-96993-6_24
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Correspondence to Pavel Y. Leonov .

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Leonov, P.Y., Suyts, V.P., Rychkov, V.A., Ezhova, A.A., Sushkov, V.M., Kuznetsova, N.V. (2022). Possibility of Benford’s Law Application for Diagnosing Inaccuracy of Financial Statements. In: Klimov, V.V., Kelley, D.J. (eds) Biologically Inspired Cognitive Architectures 2021. BICA 2021. Studies in Computational Intelligence, vol 1032. Springer, Cham. https://doi.org/10.1007/978-3-030-96993-6_24

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