Accounting and Auditing Research

Accounting and Auditing Research

Earnings Manipulation and Benford’s Law: A Study of Tehran Stock Exchange

Document Type : Original Article

Authors
Siavash Mahmoudi 1
Saeid Mahmoudi 2
1 Assistant Prof., Faculty of Accounting, Parandak Insttute of Higher Education, Parandak, Iran
2 MSc. in Accounting, Faculty of Management & Accounting, Allameh Tabataba’i University, Tehran, Iran
10.22034/iaar.2025.222688
Abstract
Information asymmetry is a fundamental issue among investors, company managers, and other interested parties and earning manipulation can be a reason of information asymmetry. Therefore, many efforts have always been made to identify earning manipulation and in this way a variety of identifying method have been proposed and tried.
Benford’s Law method is among these methods, which has been introduced recently and its higher ability in comparison with other methods such as discretionary accruals has been proved. So, in this research the frequency distribution of “first digit” of net income of listed companies of TSE, in 2009-2018  time period, is considered as the main parameter of Benford’s Law for detecting earning manipulation. Z statistical, Chi-Square, and KS tests are used to check if the net incomes conform to the Benford’s Law or not. For all industries, the results show that first digit of net income at a significance level of 0.05 comply with Benford’s Law but at a significance level of 0.10, numbers 1 and 8 do not satisfy the Benford’s law. Also, according to the results of all the various industries, the data of industry of "cement, lime and gypsum" does not obey the Benford’s law, and this non-compliance indicates that probably more companies in this industry than other industries have applied earnings manipulation and therefore, using financial reports of companies active in the aforementioned industry requires more caution. Also, based on the statistical results, for each industry some indicators for identifying earnings manipulation are proposed, which are applicable to all beneficiaries, including investors and auditors.
Keywords
: Information Asymmetry
Benford’s Law
Earnings Manipulation
Indicators of Earnings Manipulation
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Accounting and Auditing Research
Volume 17, Issue 65
Spring 2025
Pages 139-158