Accountancy Magazine Vol. 133 Issue 1327, pp. 108-110 .
ISSN/ISBN: 00014664 DOI: Not available at this time.
Abstract: This article comments on the possibility that Great Britain's Inland Revenue may be querying accounts as a result of incorrect statistical analysis. The Revenue uses the Chi Squared test to check whether taxpayers are acting honestly, or whether they may be falsifying their accounts. This is because the Chi Squared test is a statistical method for comparing expected and actual results. The Revenue uses a spreadsheet based data interrogation tool called IDEA, which has the Chi Squared test built into it. What the Revenue does with sales revenue data is to: take the sales values; tabulate them; extract the leading or test digit; create a frequency distribution of the test digits; and apply the Chi Squared test. The basic problem with the Revenue's analysis is that it fails to appreciate that sales data comprises numbers of varying length. If the retailer has rounded off the sales figures, this could affect the Chi Squared test and Benford's Law. Rounding up will cause the loss of the original tens of pence digit value and the loss of the related units of pounds value. Even if the overall impact of rounding up and down is zero over an entire financial year, Benford's Law will discover that something unusual has happened to the data. However, providing this is the sole explanation necessary for these digits. The Inland Revenue is trying to ensure that its clients are honest in all of their dealings with it. The combined Chi Squared/Benford's Law analysis is potentially an excellent way of keeping control, but only when used properly.
Reference Type: Journal Article
Subject Area(s): Accounting, Economics, Statistics