Application of Benford's Law for Fraud Detection in Financial Statements: Theoretical Review

Mihkel Tammaru, Lehte Alver
2016 Proceedings of the 5th International Conference on Accounting, Auditing, and Taxation (ICAAT 2016)   unpublished
External auditors' ability to detect profit manipulations in the financial statements is limited. Non conformity with Benford's law gives indication of the risk that a data set contains fraud, but it does not give information which items are manipulated. Knowing profit and other financial targets set to the companies it is possible, treating profits deviation from Benford's law as probability, to identify potential financial statements with manipulated profits. In this field there has been a
more » ... of research in different countries (New Zealand, USA, Finland, Japan, Germany and the others). The above-mentioned probability describing the profit manipulation risk would be very useful information for interested parties to decide whether identified financial statements require additional inspection. The aim of the current paper is to characterize Benford's law as tool for detecting financial statements with manipulated profits. The paper gives some ideas how to combine Benford's law and analytical tests.
doi:10.2991/icaat-16.2016.46 fatcat:rgsul7ajd5hwzhtk5zb7vfdage