Fraud Detection in Financial Statements Applying Benford’s Law with Monte Carlo Simulation

Vladan Pavlović (), Goranka Knežević (), Marijana Joksimović () and Dušan Joksimović ()
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Vladan Pavlović: Faculty of Economics, University of Pristina (Kosovska Mitrovica), Serbia
Goranka Knežević: Singidunum University, Belgrade, Serbia
Marijana Joksimović: Megatrend University, Belgrade, Serbia
Dušan Joksimović: Academy of Criminal Investigation and Police Studies, Belgrade, Serbia

Acta Oeconomica, 2019, vol. 69, issue 2, 217-239

Abstract: Benford’s Law is a useful tool for detecting fraud in financial statements. In this paper we test the financial item named ‘Work performed by the undertaking for its own purpose and capitalised’ applying this tool. The data are taken from the financial reports of all companies submitted to the Serbian Business Register Agency for the period of 2008–2013. Our conclusion shows that there is a very high probability that the frequency distribution of the second digit does not satisfy Benford’s Law. In other words, it implies that certain manipulations have been usually done with the second digit of the aforementioned item in the financial statement. This research confirms our hypothesis that financial statement frauds are usually conducted using the second digit.

Keywords: Benford’s Law; income statement; auditing; financial fraud; Monte Carlo simulation (search for similar items in EconPapers)
JEL-codes: C15 G30 M41 M42 (search for similar items in EconPapers)
Date: 2019
Note: This paper is a part of the results of the Research Project No. 179001 and Project III 45003 supported by the Ministry of Education, Science and Technological Development of the Republic of Serbia.
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