EARNINGS MANAGEMENT DETECTION: PRACTICAL APPLICATION OF BENFORD'S LAW IN BUSINESS PRACTICE
Keywords:earnings management, earnings manipulation, Bedford’s law, financial reports
Background: Benford's Law referring to the frequency distribution of digits in many real-life sources of data states that there is a naturally occurring set of numbers, which can help alert enterprises to possible errors, potential fraud, manipulation practices, or other irregularities. Aim: The main aim of this paper was to apply Benford's law to the Slovak conditions, and verify its successful implementation in commercial practice. Methods: To identify the manipulation practices, this mathematical principle defining the frequency of occurrence of digits was applied. Benford's law is based on the assumption that the sequences of numbers follow certain formulas that can be predicted. Sample: The law is verified in the agricultural sector, which is often connected with financial fraud. Results: The outputs of the analysis confirm the relevance of this method usage in the process of the detection of earnings management practices in enterprises. Conclusions: Thus, it can be concluded, that researchers and accountants often compare the leading digits of financial transaction data to a Benford curve to spot anomalies that may indicate fraud and discover numerical anomalies. Implications: Analysts can use this law to detect certain fluctuations in data that may signal fraudulent reporting.