Applying Benford’s law to examine earnings management: evidence from emerging ASEAN-5 countries

Abstract

Purpose: This study aims to apply Benford’s law to examine the earnings management of companies listed in emerging ASEAN-5 countries: Indonesia, Malaysia, Philippines, Thailand and Vietnam. Design/methodology/approach: The authors follow Amiram et al. (2015) to measure deviations from Benford’s law of the first digits of numbers reported in financial statements. The authors use the Jones-modified performance-match model (Jones, 1991; Dechow et al., 1995; Kothari et al., 2005) to estimate accrual earnings management. The authors use a sample of 47,389 observations of listed companies in ASEAN-5 countries from 2006 to 2019. The authors also run ordinary least squares (OLS) regressions to test the hypotheses. Findings: The authors find that the first digits of numbers reported in the financial statements of companies in the sample closely conform to Benford’s law. Further evidence shows that the deviation from Benford’s law is positively related to abnormal accruals. The relationship between deviation from Benford’s law and abnormal accruals is more pronounced for the post-international financial reporting standards adoption period. The results survive for some robustness checks. Research limitations/implications: The authors show that Benford’s law holds for financial statements of companies listed in the emerging ASEAN-5 countries. Practical implications: Auditors could use Benford’s law as an analytical procedure to assess the risks of material misstatements. Also, other users could apply Benford’s law on audited financial statements to foresee undetected misstatements. Originality/value: The authors provide original evidence that financial statements of ASEAN-5 countries follow Benford’s law. The evidence supports the usefulness of Benford’s law in developing markets.