Is conditional conservatism a source of deviations of financial statements from Benford’s Law?

Article


Nguyen, T. T., Duong, C. and Nguyen, N. T. M. 2022. Is conditional conservatism a source of deviations of financial statements from Benford’s Law? Journal of Applied Accounting Research. https://doi.org/10.1108/JAAR-02-2021-0037
AuthorsNguyen, T. T., Duong, C. and Nguyen, N. T. M.
Abstract

Purpose – In this paper, we examine the association between conditional conservatism and deviations of the first digits of financial statement items from what are expected by Benford’s Law.
Design/methodology/approach – This research uses data of companies listed on the London Stock Exchange. We measure deviations of first digits from Benford’s Law following Amiram et al. (2015) and firm-year conditional conservatism following previous studies (Basu, 1997; Khan and Watts, 2009; García Lara et al., 2016). We use multiple regressions to provide evidence for our hypothesis.
Findings - The results show that conditional conservatism is positively associated with deviations from Benford’s Law. The findings are robust across different measures of deviations and conditional conservatism. Also, we find that the relationship between deviations from Benford’s Law and conditional conservatism is more pronounced for firms with debt issuance, and for leveraged firms facing financial distress. Next, our analyses confirm previous evidence by showing that the first digits of financial statement items of UK listed companies conform to Benford’s Law at the firm-specific level and the market level, and deviations of income statements are larger than those of balance sheets and cash flow statements.
Research limitations/implications – The research makes significant contributions to the literature. First, this is the first study that provides empirical evidence suggesting conditional conservatism may be a source of deviations from Benford Law. Second, we provide evidence confirming previous US findings (e.g., Amiram et al., 2015) showing that the distributions of first digits of financial statement items of UK listed companies also conform to Benford’s Law.
Practical implications – Our findings have implications for auditors. Auditors should be aware of “false positive” for material misstatements when using Benford’s Law as a risk assessment procedure. While both conditional conservatism and earnings management are related to deviations from Benford’s Law, conservatism-related biases could indicate less audit risks.
Originality/value – We provide new and original evidence suggesting that conditional conservatism is related to deviations from Benford’s Law.

JournalJournal of Applied Accounting Research
ISSN0967-5426
Year2022
PublisherEmerald Publishing Limited
Accepted author manuscript
License
File Access Level
Anyone
Digital Object Identifier (DOI)https://doi.org/10.1108/JAAR-02-2021-0037
Publication dates
Online12 Jan 2022
Publication process dates
Accepted21 Dec 2021
Deposited14 Jan 2022
Copyright holder© 2022 Emerald Publishing Limited
Additional information

This author accepted manuscript is deposited under a Creative Commons Attribution Non-commercial 4.0 International (CC BY-NC) licence. This means that anyone may distribute, adapt, and build upon the work for non-commercial purposes, subject to full attribution. If you wish to use this manuscript for commercial purposes, please contact permissions@emerald.com.

Permalink -

https://repository.uel.ac.uk/item/8q270

Download files


Accepted author manuscript
Benford Law -Duong.pdf
License: CC BY-NC 4.0
File access level: Anyone

  • 167
    total views
  • 15
    total downloads
  • 17
    views this month
  • 0
    downloads this month

Export as

Related outputs

CEO Profile and Earnings Quality
Nguyen, T. T., Duong, C. and Narendran, S. 2021. CEO Profile and Earnings Quality. Review of Quantitative Finance and Accounting. 56, pp. 987-1025. https://doi.org/10.1007/s11156-020-00916-7
Accounting conservatism and banking expertise on board of directors
Nguyen, T. T., Duong, C., Nguyen, N. T. M. and Bui, H. Q. 2019. Accounting conservatism and banking expertise on board of directors. Review of Quantitative Finance and Accounting. 55, p. 501–539. https://doi.org/10.1007/s11156-019-00851-2
What Make the Impact of the Financial Crisis on Innovation Different Across European Countries?
Nguyen, Nguyet Thi Minh and Duong, C. 2019. What Make the Impact of the Financial Crisis on Innovation Different Across European Countries? International Journal of Innovation and Technology Management. 16 (Art. 1950041). https://doi.org/10.1142/S021987701950041X
Overvaluation and earnings management: Does the degree of overvaluation matters?
Duong, C. and Pescetto, Gioia 2018. Overvaluation and earnings management: Does the degree of overvaluation matters? Accounting and Business Research. 49 (2), pp. 121-146. https://doi.org/10.1080/00014788.2018.1451737
How value–glamour investors use financial information: UK evidence of investors’ confirmation bias
Duong, C., Pescetto, G. and Santamaria, D. 2014. How value–glamour investors use financial information: UK evidence of investors’ confirmation bias. The European Journal of Finance. 20 (6), pp. 524-549. https://doi.org/10.1080/1351847X.2012.722117