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Davydov, D and Swidler, S (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), pp. 1-20.

ISSN/ISBN: Not available at this time. DOI: 10.1142/S0219091516500211



Abstract: Benfordís 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 Benfordís 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.


Bibtex:
@article{, issn = {0219-0915}, journal = {Review of Pacific basin financial markets and policies}, pages = {1650021}, volume = {19}, publisher = {World Scientific Pub}, number = {4}, year = {2016}, title = {Reading Russian Tea Leaves: Assessing the Quality of Bank Financial Statements with the Benford Distribution}, address = {[Singapore] :}, author = {Davydov, Denis and Swidler, Steve}, doi = {10.1142/S0219091516500211}, url = {https://ideas.repec.org/a/wsi/rpbfmp/v19y2016i04ns0219091516500211.html}, }


Reference Type: Journal Article

Subject Area(s): Accounting, Economics