Identifying Odometer Fraud: Evidence from the Used Car Market in the Czech Republic

Abstract

This paper investigates the presence of odometer fraud in the used-car market in the Czech Republic using a unique dataset of 250,000 car-sale ads. Alternative identification techniques are also discussed. However, selection into the market as well as the practice of rounding odometer readings-possibly strategic yet innocent-render the standard statistical tests unusable. A modification of the last-digit test, which was previously used to detect fraud in election and accounting data, is therefore developed and employed. The results suggest that suspicious patterns are more prevalent in the segment of cars imported from abroad. I also show that this methodology can be used at the firm-level, which may be of interest to authorities and market participants.

Misreporting in financial statements in a centrally planned economy: The case of Czechoslovak state-owned enterprises in late socialism

“…However, they allow for the use of the so-called digits tests. These tests are commonly used for accounting, election, and other fraud detection (Carslaw, 1988;Cho and Gaines, 2007;Debreceny and Gray, 2010;Montag, 2015;Thomas, 1989;Varian, 1972). These tests are based on the observation that distribution of the first digits in the set of counting numbers should follow Benford's distribution.…”