IDEAS home Printed from https://ideas.repec.org/a/wsi/rpbfmp/v19y2016i04ns0219091516500211.html
   My bibliography  Save this article

Reading Russian Tea Leaves: Assessing the Quality of Bank Financial Statements with the Benford Distribution

Author

Listed:
  • Denis Davydov

    () (Department of Accounting and Finance, University of Vaasa, P. O. Box 700, FI-65101 Vaasa, Finland)

  • Steve Swidler

    (Department of Finance, Auburn University, Lowder 303, Auburn University, Auburn, AL 36849, USA)

Abstract

Benford’s Law, a rule concerning first digits of an array of numbers, has frequently been used to test for the reporting quality of financial statements. When applied to the recent experience for Russian banks, one conclusion is that the 2004 regime shift in accounting standards produced higher quality financial statements. Prior to 2004, the Benford evidence suggests that Russian banks tended to round revenues up, expenses down and thus overstate net income. It also appears that banks may have presented stronger balance sheets than warranted. In the second part of the analysis, the practical use of Benford’s Law to discern a looming bank failure appears limited. While there is, perhaps, some beneficial information to be drawn from testing for Benford distribution conformity, in isolation the tests for financial statement manipulation are inconclusive. Instead, Benford might be used with other early warning detection algorithms to recognize impending bank failures.

Suggested Citation

  • Denis Davydov & Steve Swidler, 2016. "Reading Russian Tea Leaves: Assessing the Quality of Bank Financial Statements with the Benford Distribution," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-20, December.
    • Handle: RePEc:wsi:rpbfmp:v:19:y:2016:i:04:n:s0219091516500211
    DOI: 10.1142/S0219091516500211
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219091516500211
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. 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.
    2. Mary E. Barth & Wayne R. Landsman & Mark H. Lang, 2008. "International Accounting Standards and Accounting Quality," Journal of Accounting Research, Wiley Blackwell, vol. 46(3), pages 467-498, June.
    3. Holger Daske & Günther Gebhardt, 2006. "International financial reporting standards and experts’ perceptions of disclosure quality," Abacus, Accounting Foundation, University of Sydney, vol. 42(3‐4), pages 461-498, September.
    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. Kauko, Karlo, 2019. "Benford’s law and Chinese banks’ non-performing loans," BOFIT Discussion Papers 25/2019, Bank of Finland, Institute for Economies in Transition.
    2. 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.

    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:wsi:rpbfmp:v:19:y:2016:i:04:n:s0219091516500211. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tai Tone Lim). General contact details of provider: http://www.worldscinet.com/rpbfmp/rpbfmp.shtml .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.