Benford’s Law and the effects of the Korean financial reforms on cosmetic earnings management

Lacina, Michael; Lee, B. Brian; Kim, Dong Wuk

doi:10.1016/j.intaccaudtax.2017.12.002

Cited by 9 publications

(8 citation statements)

References 29 publications

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“…Given that the number of observations used in this research to test compliance to Benford’s Law varies between 93 and 686 observations, Chi-square was chosen to test the first digits for all observations, at a confidence level of 95%. In order to test the conformity to each digit, Z test was used, similarly with other studies [ 28 , 40 , 62 , 63 ].…”

Section: Methodsmentioning

confidence: 99%

“…Standard deviation of differences between data set and Benford’s Law distributions is 0.86% before IFRS implementation and 1.61% after IFRS implementation. Z-Score is calculated for each digit, similarly with the studies of Lacina et al [ 28 ], Carslaw [ 40 ], Costa et al [ 62 ] and Santos et al [ 63 ].…”

Section: Figurementioning

confidence: 99%

“…Certification of the reliability of information, disclosed in the companies’ financial statements, through the use of Benford’s Law, has been performed on capital markets of different countries: Hungary [ 25 ], India [ 26 ], Indonesia [ 27 ], Korea [ 28 ], Poland [ 29 ], Romania [ 30 ], Russia [ 31 ], Taiwan [ 32 ], Turkey [ 33 ], UK [ 34 ] and USA [ 35 , 36 ].…”

Section: Introductionmentioning

confidence: 99%

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Reliability of Financial Information from the Perspective of Benford’s Law

Jianu

2021

Entropy

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This study investigates the conformity to Benford’s Law of the information disclosed in financial statements. Using the first digit test of Benford’s Law, the study analyses the reliability of financial information provided by listed companies on an emerging capital market before and after the implementation of International Financial Reporting Standards (IFRS). The results of the study confirm the increase of reliability on the information disclosed in the financial statements after IFRS implementation. The study contributes to the existing literature by bringing new insights into the types of financial information that do not comply with Benford’s Law such as the amounts determined by estimates or by applying professional judgment.

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Section: Methodsmentioning

confidence: 99%

Section: Figurementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Reliability of Financial Information from the Perspective of Benford’s Law

Jianu

2021

Entropy

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“…Thus, firms may suppress the first digit of negative earnings by retaining high second digits. Niskanen and Keloharju (2000), Van Caneghem (2002), Skousen, Guan, and Wetzel (2004), and Lacina, Lee, and Kim (2018) find similar types of earnings management based on different country samples, such as Finnish, British, Japanese, and Korean samples, respectively. However, the application of these techniques is limited as a large number of sample firms are required to carry out these research methods.…”

Section: Unusual Frequencies Of Digits In Collected Accounting Numbersmentioning

confidence: 92%

Accruals, Earnings Quality and Research Methodology

2020

JABE

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We first review prior earnings management studies with an emphasis on discretionary accruals as a proxy for earnings management. Discretionary accruals are estimated using widely accepted models, such as the Jones model or its updated ones with additional control variables to improve their prediction power. Nonetheless, estimated discretionary accruals are still subject to model specification errors. Then, we review alternative methods to identify earnings management by evaluating earnings distribution properties and frequencies of digits in collected accounting numbers. These alternative methods can identify anomalies in earnings distributions or frequencies of digits but cannot explain how such anomalies take place. Accordingly, future studies of earnings management may employ these alternative methods in conjunction with discretionary accruals to offer a better insight into earnings management practices. Meeting Analysts' Expectations Using Discretionary AccrualsMatsumoto (2002) reports that firms use discretionary accruals to meet or beat the mean of analysts' quarterly earnings forecasts. Firms that meet market expectations show a greater frequency of positive discretionary accruals than do their counterparts that miss them. Similarly, Payne and Robb (2000) report that discretionary accruals depend on the relative amounts of the mean of analysts' forecasts in the month preceding the annual earnings announcement and pre-managed earnings. If the former is higher than the latter, firms report positive discretionary accruals. If, however, the former is lower than the latter, firms report negative discretionary accruals.Dechow, Richardson and Tuna (2000) also report high discretionary accruals and working capital for firms that meet analysts' forecasts as compared to their counterparts that do not. Besides, these firms show high market capitalization and high market-to-book ratios with positive abnormal stock returns in the following year. As a result, managers of these firms anticipate optimistic financial outcomes in the near future and thus may attempt to exhibit their private information by meeting analysts' forecasts. Otherwise, their shareholders would be unfairly penalized for missing analysts' forecasts.Burgstahler and Eames (2006) analyze distributions of earnings forecast errors and report a very high frequency of zero and small positive forecast errors and a very low frequency of small negative forecast errors, consistent with the findings of Burgstahler and Dichev (1997). The unusually large number of zero and small positive forecast errors results from the combination of upward earnings management and downward forecast management. In other words, with the end of a year approaching, analysts revise their forecasts downward and managers may engage in managing both cash flows and discretionary accruals upward to meet revised earnings forecasts.In summary, earnings outperforms cash flow from operations in predicting future cash flows in general research settings. Depending on the underlying motivations o...

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“…Although, while we expect that each company's Board of Directors would continue to develop strategic policies and monitor the overall activities of management (Burghleh & Al-Okdeh, 2020), the fact that corporate managers may still act for personal gains rather than in the interest of shareholders cannot be completely ruled out. In fact, studies had pointed that managers may sometimes be involved in opportunistic actions such as the deliberate alteration of financial statements' contents possibly to conceal the actual economic conditions of companies for private gains or other purposes (Muramiya & Takada, 2017;Lacina, Lee & Kim, 2018;Agustia, Muhammad & Permatasari, 2020;Sianturia, Wahyudi, Pangestuti & Utomo, 2020). Such action of management which may influence contractual outcomes or mislead interested parties as a result of the distortions in the reported earnings of companies, best describes the concept of earnings management (Ubesie, Ogbu & Mbah, 2019;Dao & Ngo, 2020).…”

Section: Introductionmentioning

confidence: 99%

Board Structure of Corporate Organizations and Earnings Management: Does Size and Independence of Corporate Boards Matter for Nigerian Firms?

Ideh

Jeroh

Ebiaghan

2021

IJFR

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The relationship subsisting between board structure of corporate organizations and earnings management has attracted several concerns particularly to regulatory agencies, management, accounting practitioners and researchers alike. Therefore, this study, examined the extent to which board independence and size influence the level of earnings management of publicly quoted Nigerian firms. For this purpose, the adoption of the International Financial Reporting Standards (IFRS) and the age of firms were introduced as mediating variables. Secondary data were however pooled from the financial statements of ninety-two (92) firms cutting across ten (10) industrial sectors from 2007–2018 (12 years). The regression analysis amidst other relevant statistical techniques was adopted to analyze the collated pooled data. Evidence from our result indicates that with the introduction of IFRS adoption and firm age as mediating variables, the Fcal obtained was 1.72 (p-value = 0.1424), thus indicating that the size of boards and the presence of independent directors (board independence) in corporate boards could not significantly influence the level of earnings management in Nigerian firms. We therefore recommend that in order to regulate managements’ opportunistic behavior/earnings management, regulators and stakeholders who are charged with the task of performing oversight functions on the activities of management should lay more emphasis on ensuring that preparers of financial statements fully comply with the provisions of IFRS and other regulatory requirements for financial reporting.

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Benford’s Law and the effects of the Korean financial reforms on cosmetic earnings management

Cited by 9 publications

References 29 publications

Reliability of Financial Information from the Perspective of Benford’s Law

Reliability of Financial Information from the Perspective of Benford’s Law

Accruals, Earnings Quality and Research Methodology

Board Structure of Corporate Organizations and Earnings Management: Does Size and Independence of Corporate Boards Matter for Nigerian Firms?

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