Predictability of financial statements fraud-risk using Benford’s Law

Mehdi Rad, Ali Amiri, Mohammad Hussein Ranjbar, Hojatollah Salari and David McMillan

Cogent Economics & Finance, 2021, vol. 9, issue 1, 1889756

Abstract: The main objective of this research is to investigate the Predictability of Financial Statements Fraud-Risk Using Benford’s Law on the Tehran Stock Exchange. Therefore, based on financial fraud detection criteria, a sample of 50 companies was extracted that 25 companies had fraud-risk in financial statements (experimental group) and 25 did not have fraud-risk (control group). Next, the frequency distribution of the first left digit of the numbers in the financial statements as well as the financial ratios of both groups was extracted, and their conformity with Benford’s distribution was evaluated through the chi-square test to test the research hypotheses. The comparison between the mentioned frequency distribution and Benford’s distribution showed a significant difference. The result indicates that Benford’s law cannot predict the financial statements fraud-risk of companies, in other words, Benford’s law cannot separate companies with fraud-risk from those without fraud-risk in financial statements.

Date: 2021
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DOI: 10.1080/23322039.2021.1889756

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