IDEAS home Printed from https://ideas.repec.org/p/hal/journl/hal-01059758.html
   My bibliography  Save this paper

Detecting Cosmetic Debt Management Using Benford's Law

Author

Listed:
  • Dominique Geyer

    (Audencia Recherche - Audencia Business School)

  • Christoph Drechsler

    (University College of Dublin - UCD - University College Dublin [Dublin])

Abstract

Benford's law states that the frequency of first significant digit in certain samples decreases as those digits increase. This law is used in accounting to find rounding behavior. Several studies provided evidence that firms may round up earnings when they are just below reference points denoted by Nx10k. Most studies are focused on earnings variables. Few studies are focused on other accounting variables like sales for example (Jordan & Alii, 2009; Geyer, 2012). No previous study examines accounting variable from balance sheet (excepted earnings of course). The aim of this short paper is to investigate rounding behavior of long term debt. Using a sample of US public companies, we observe that US firms round down the total long term debt considering two cognitive points: Nx10k and (2xN+1)x5x10j (N is an integer between 1 to 9; k is an integer from 1 and j is an integer from 0). In other words, US public firms exercise Cosmetic Debt Management.

Suggested Citation

  • Dominique Geyer & Christoph Drechsler, 2014. "Detecting Cosmetic Debt Management Using Benford's Law," Post-Print hal-01059758, HAL.
    • Handle: RePEc:hal:journl:hal-01059758
    Note: View the original document on HAL open archive server: https://audencia.hal.science/hal-01059758
    as

    Download full text from publisher

    File URL: https://audencia.hal.science/hal-01059758/document
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Chin Hsien Hsieh & Fengyi Lin, 2013. "Applying digital analysis to detect fraud: an empirical analysis of US marine industry," Applied Economics, Taylor & Francis Journals, vol. 45(1), pages 135-140, January.
    2. Jyrki Niskanen & Matti Keloharju, 2000. "Earnings cosmetics in a tax-driven accounting environment: evidence from Finnish public firms," European Accounting Review, Taylor & Francis Journals, vol. 9(3), pages 443-452.
    3. Tom Van Caneghem, 2004. "The impact of audit quality on earnings rounding-up behaviour: some UK evidence," European Accounting Review, Taylor & Francis Journals, vol. 13(4), pages 771-786.
    4. Das, Somnath & Zhang, Huai, 2003. "Rounding-up in reported EPS, behavioral thresholds, and earnings management," Journal of Accounting and Economics, Elsevier, vol. 35(1), pages 31-50, April.
    5. George Judge & Laura Schechter, 2009. "Detecting Problems in Survey Data Using Benford’s Law," Journal of Human Resources, University of Wisconsin Press, vol. 44(1).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ahmad Ahed Bader & Mousa Mohammad Abdullah Saleh, 2017. "Evidence on the Extent of Cosmetic Earnings and Revenues Management by Jordanian Companies," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 20-30.
    2. Al-Rawashdeh, Firas, 2017. "Applying Benford's law into Jordanian insurance companies to identify earning's manipulations," Business and Economic Horizons (BEH), Prague Development Center (PRADEC), vol. 13(2).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bernhard Rauch & Max G�ttsche & Stephan Langenegger, 2014. "Detecting Problems in Military Expenditure Data Using Digital Analysis," Defence and Peace Economics, Taylor & Francis Journals, vol. 25(2), pages 97-111, April.
    2. Bernhard Rauch & Max Göttsche & Gernot Brähler & Stefan Engel, 2011. "Fact and Fiction in EU‐Governmental Economic Data," German Economic Review, Verein für Socialpolitik, vol. 12(3), pages 243-255, August.
    3. Henselmann, Klaus & Scherr, Elisabeth & Ditter, Dominik, 2012. "Applying Benford's Law to individual financial reports: An empirical investigation on the basis of SEC XBRL filings," Working Papers in Accounting Valuation Auditing 2012-1, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Accounting and Auditing.
    4. Theoharry Grammatikos & Nikolaos I. Papanikolaou, 2021. "Applying Benford’s Law to Detect Accounting Data Manipulation in the Banking Industry," Journal of Financial Services Research, Springer;Western Finance Association, vol. 59(1), pages 115-142, April.
    5. Bonache, Adrien & Moris, Karen, 2009. "Nonlinear and chaotic patterns in Japanese video game console sales and consequences for management control," MPRA Paper 18196, University Library of Munich, Germany.
    6. Tom Van Caneghem, 2004. "The impact of audit quality on earnings rounding-up behaviour: some UK evidence," European Accounting Review, Taylor & Francis Journals, vol. 13(4), pages 771-786.
    7. Charles E. Jordan & Stanley J. Clark & Marilyn A. Waldron, 2014. "Cosmetic Earnings Management before and after Corporate Governance Legislation in Canada," Accounting and Finance Research, Sciedu Press, vol. 3(4), pages 105-105, August.
    8. Sebastian Lebert & Ulf Mohrmann & Ulrike Stefani, 2021. "Rounding up performance measures in German firms: Earnings cosmetics or earnings management on a larger scale?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(3-4), pages 564-586, March.
    9. Henselmann, Klaus & Scherr, Elisabeth & Ditter, Dominik, 2013. "Applying Benford's Law to individual financial reports: An empirical investigation on the basis of SEC XBRL filings," Working Papers in Accounting Valuation Auditing 2012-1 [rev.], Friedrich-Alexander University Erlangen-Nuremberg, Chair of Accounting and Auditing.
    10. Etienne Harb & Nohade Nasrallah & Rim El Khoury & Khaled Hussainey, 2022. "Applying Benford’s Law to detect accounting data manipulation in the pre-and post-financial engineering periods: Evidence from Lebanon," Working Papers of LaRGE Research Center 2022-10, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    11. Michael Lacina & B. Brian Lee & Dong Wuk Kim, 2018. "Management of Revenue and Earnings in Korean Firms Influenced by Cognitive Reference Points," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-36, June.
    12. Bonache, Adrien & Moris, Karen & Maurice, Jonathan, 2009. "Risque associé à l'utilisation de la loi de Benford pour détecter les fraudes dans le secteur de la mode [Risk of Reviews based on Benford Law in the Fashion Sector]," MPRA Paper 15352, University Library of Munich, Germany.
    13. Marcel Haak & Michelle Muraz & Roland Zieseniß, 2018. "Joint Audits: Does the Allocation of Audit Work Affect Audit Quality and Audit Fees?," Accounting in Europe, Taylor & Francis Journals, vol. 15(1), pages 55-80, January.
    14. Ronelle Burger & Canh Thien Dang & Trudy Owens, 2017. "Better performing NGOs do report more accurately: Evidence from investigating Ugandan NGO financial accounts," Discussion Papers 2017-10, University of Nottingham, CREDIT.
    15. Villas-Boas, Sofia B. & Fu, Qiuzi & Judge, George, 2017. "Benford’s law and the FSD distribution of economic behavioral micro data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 486(C), pages 711-719.
    16. Ashton, John K. & Hudson, Robert S., 2008. "Interest rate clustering in UK financial services markets," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1393-1403, July.
    17. repec:bof:bofrdp:urn:nbn:fi:bof-201508131351 is not listed on IDEAS
    18. Yves Mard, 2003. "Performance Comptable Et Gestion Des Resultats," Post-Print halshs-00582798, HAL.
    19. Oriol Amat & Catherine Gowthorpe, 2004. "Creative accounting: Nature, incidence and ethical issues," Economics Working Papers 749, Department of Economics and Business, Universitat Pompeu Fabra.
    20. Aerts, Walter & Campenhout, Geert Van & Caneghem, Tom Van, 2008. "Clustering in dividends: Do managers rely on cognitive reference points?," Journal of Economic Psychology, Elsevier, vol. 29(3), pages 276-284, June.
    21. Hribar, Paul & Jenkins, Nicole Thorne & Johnson, W. Bruce, 2006. "Stock repurchases as an earnings management device," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 3-27, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:hal-01059758. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.