Abstract
This study applies Benford’s Law to four account balances of healthy operating companies and bankrupt fraudulent companies to determine if the probability distributions related to the accounts are different between the two types of companies. Account balances for Revenue, Expense, Income Tax Expense, and Earnings per Share were drawn from three years of quarterly and annual financial statements. Two calculation models of Mean Absolute Deviation were used in assessing the conformity range of the account balances to Benford’s Law. Combination of the two models indicates that the Expense account of the healthy operating companies was in conformity with Benford’s Law, while the Expense account of bankrupt fraudulent companies was in nonconformity. Z scores were calculated to evaluate conformity of each data point to expected occurrences. For both types of companies, significant first-digit nonconformity was found in accounts showing Benford nonconformity. The study shows that Benford’s Law applied to financial statement data can differentiate between accounts in contrasting company types.
Recommended Citation
Johnson, Gary G.; Varnon, Anthony W.; and Zhang, Shuyang
(2017)
"Using Benford’s Law and Mean Absolute Deviation to Distinguish Bankrupt Fraudulent Companies and Healthy Currently Operating Companies,"
Journal of Business, Industry, and Economics: Vol. 22, Article 2.
Available at:
https://roar.una.edu/jobie/vol22/iss1/2