For citation:
Nazarova, V. V., Churakova, I. Yu., & Kupriyanov, D. A. (2023). Assessing Financial Statement Reliability in European Companies Using Benford’s Law. AlterEconomics, 20(3), 691–711. https://doi.org/10.31063/AlterEconomics/2023.20-3.10
Abstract:
The manipulation of financial reporting and data reliability in statements has become increasingly prevalent since the Enron scandal in 2001, with companies employing various strategies to enhance their stock prices and attract investors, occasionally resorting to unethical practices. Benford’s Law, a mathematical tool dating back to 1938 and popularized by mathematician Nigrini in 1995 for analyzing tax declarations, is employed in this study as a means of identifying potential accounting irregularities. Benford’s Law, also known as the “law of the first digit”, asserts that numbers starting with one are three times more likely to appear in datasets than predicted by a normal distribution, with calculable probabilities. This study aims to validate European companies’ data using Benford’s Law. The paper explores the theoretical underpinnings of Benford’s Law, reviews key research on the subject, and examines methods for assessing the reliability of reporting data. Additionally, the paper contains an analysis of data from European companies. Based on this analysis, an algorithm has been developed, enabling the verification of reporting data and the assessment of their compliance with Benford’s frequencies. This approach proves valuable for examining financial reporting in various industries, countries, and individual companies. The findings help identify which European countries and sectors have the highest occurrences of financial statement falsification or intentional adjustments.
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