Applying Benford’s Law to Examine the Quality of Reported Income Numbers of Unlisted Firms

Abstract

The present study makes an attempt to examine the quality of reported income numbers of unlisted firms in India. The Benford"s Law is applied to examine the digital occurrence of reported income numbers of unlisted firms. The analysis is based on 43,996 reported annual income numbers of 22,147 sample firms during the financial years from 2000-01 to 2011-12. Further, the results are analyzed under four different scenarios viz., ownership, size, age and nature of industry. The empirical results show that the observed proportionate occurrence of zero is significantly less than the expected proportionate occurrence. These results are contrary to the findings of the related studies of listed companies. The results indicate lower quality of reported income numbers of unlisted firms. Based on the scenario analysis, the empirical results indicate that the proportionate occurrence of second single digits of state-owned unlisted firms confirm the Benford"s Law. The present study contributes to the literature by examining the quality of reported income numbers of unlisted firms using the Benford"s Law.