Financial Statement Irregularities: Evidence from the Distributional Properties of Financial Statement Numbers

• DOI: 10.2139/ssrn.2374093
• Publication Date: 2014-01-08T16:16:15Z
• Authors: Dan Amiram; Zahn Bozanic; Ethan Rouen
• Keywords: Financial statement analysis; Statement (logic); Financial statement

Motivated by methods used to evaluate the quality of data, we create a novel firm-year measure estimate level error in financial statements. The measure, which has several conceptual and statistical advantages over available alternatives, assesses extent features distribution firm’s statement numbers diverge from theoretical posited Benford’s Law. After providing intuition for theory underlying use numerical demonstrate that certain types increase deviation distribution. We corroborate analysis with simulation reveals introduction errors reported revenue also increases deviation. then provide empirical evidence captures data quality. first show measure’s association commonly measures accruals-based earnings management manipulation. Next, i) restated statements more closely conform Law than misstated versions same ii) as divergence increases, persistence decreases. Finally, our predicts material misstatements identified SEC Accounting Auditing Enforcement Releases (AAERs) can be leading indicator identify misstatements.