Applying Benford's law to detect accounting data manipulation in the pre- and post-financial engineering periods

Abstract

PurposeLebanon has faced one of the most severe financial and economic crises since the end of 2019. The practices of the Lebanese banks are blamed for dangerously exposing economic agents and precipitating the current financial collapse. This paper examines the patterns of manipulation of the 10 biggest banks before and after implementing the financial engineering mechanism.Design/methodology/approachThe authors apply Benford law for the first and second positions of the reports of condition and income and four out of the six aspects of the CAMELS rating system (Capital Adequacy, Assets Quality, Management expertise, Earnings Strength, Liquidity and Sensitivity to the market) by excluding Management and Sensitivity. The deviations from BL frequencies are tested using Z-statistic and Chi-square tests.FindingsBanks seem to have manipulated their Capital Adequacy, Liquidity and Assets Quality in the pre-financial engineering and considerably in the post-financial engineering periods. Fraudulent manipulations in the banking sector can distort depositors, shareholders and regulating authorities.Research limitations/implicationsThis study has many implications for governmental authorities, commercial banks, depositors, businesses, accounting and auditing firms, and policymakers. The Lebanese government needs to implement corrective fiscal and monetary policies and apply amendments to the bank secrecy and capital control law. The central bank should revamp its organizational structure, improve its disclosure practices and significantly reduce its ties to the government and the political elite.Practical implicationsThe study findings suggest that the central bank should revamp its organizational structure, improve its disclosure practices and significantly reduce its ties to the government and the political elite.Originality/valueThe study is the first to examine the patterns of fraudulent manipulation in the Lebanese banking industry using Benford Law (BL).

Evaluasi Efektivitas Pengukuran Laporan Keuangan: A Systematic Literature Review

“…Beberapa metode pendeteksian fraud dikemukakan oleh Profesor Messod Beneish dengan formula M-Score untuk mengidentifikasi tingkat pendapatan perusahaan dengan fokus pada perkiraan tingkat manipulasi laba. Metode ini mengadopsi beberapa metrik keuangan untuk melakukan analisis dan memberikan skor yang dapat mengindikasikan apakah suatu perusahaan mungkin terlibat dalam praktik manipulasi laba, yang berguna untuk mengetahui potensi kecurangan atau perilaku tidak etis yang berkaitan dengan pelaporan keuangan perusahaan, dengan memanfaatkan delapan rasio (Beneish et al, 2013) 57) tahun kemudian, Benford law ditemukan kembali oleh Frank Benford pada tahun 1938 dalam artikelnya "The Law of Anomalous Numbers" yang mengamati bahwa halaman yang berisi logaritma angka rendah 1 dan 2 cenderung lebih sering digunakan dibandingkan halaman dengan angka 8 dan 9 (Harb et al, 2023). Benford mempelajari angkaangka yang terjadi secara alami dan menemukan bahwa angka-angka tersebut mengikuti distribusi first significant digit yang sama (Golbeck, 2023).…”