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Larsen, JE (2017)

Benford’s Law and Earnings Management Detection: The Case of REITs

Journal of Forensic & Investigative Accounting 9(2), pp. 779-790.

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

Abstract: Benford’s Law has been employed by auditors to identify suspicious financial data and by researchers to investigate whether financial data has been manipulated in various industries, but the present study is the first to apply the concept to Real Estate Investment Trusts (REITs). Researchers using other investigative techniques report that REITs have systematically practiced earnings management. In the present study, a Benford test is conducted on quarterly REIT net income, collected for the years 2009 through 2014 and the results are analyzed using the Mean Absolute Deviation. For the full sample, no earnings management is detected; the distribution of both the first and second digits of net income conforms to a Benford’s distribution, but we cannot be certain whether this means the REITs in our sample did not manage earnings or that they did and the test failed to detect it. Tests on subsamples of the data provide different results. Combined with the results for the full sample, the latter finding is consistent with an issue critics of Benford’s Law find troublesome.

@article{, author = {James E. Larsen}, year = {2017}, title = {Benford’s Law and Earnings Management Detection: The Case of {REITs}}, journal = {Journal of Forensic \& Investigative Accounting}, volume = {9}, number = {2}, pages = {779--790}, url = {'s_Law_and_Earnings_Management_Detection_The_Case_of_REITs}, }

Reference Type: Journal Article

Subject Area(s): Accounting