Download this Paper Open PDF in Browser

Financial Statement Errors: Evidence from the Distributional Properties of Financial Statement Numbers

76 Pages Posted: 3 Jan 2014 Last revised: 10 Dec 2015

Dan Amiram

Columbia Business School - Accounting, Business Law & Taxation

Zahn Bozanic

Ohio State University (OSU) - Fisher College of Business

Ethan Rouen

Harvard Business School

Date Written: August 2, 2015

Abstract

Motivated by methods used to evaluate the quality of data, we create a novel firm-year measure to estimate the level of error in financial statements. The measure, which has several conceptual and statistical advantages over available alternatives, assesses the extent to which features of the distribution of a firm’s financial statement numbers diverge from a theoretical distribution posited by Benford’s Law. After providing intuition for the theory underlying the measure, we use numerical methods to demonstrate that certain error types in financial statement numbers increase the deviation from the theoretical distribution. We corroborate the numerical analysis with simulation analysis that reveals that the introduction of errors to reported revenue also increases the deviation. We then provide empirical evidence that the measure captures financial statement data quality. We first show the measure’s association with commonly used measures of accruals-based earnings management and earnings manipulation. Next, we demonstrate that i) restated financial statements more closely conform to Benford’s Law than the misstated versions in the same firm-year and ii) as divergence from Benford’s Law increases, earnings persistence decreases. Finally, we show that our measure predicts material misstatements as identified by SEC Accounting and Auditing Enforcement Releases (AAERs) and can be used as a leading indicator to identify misstatements.

Keywords: Benford’s Law, Financial Statements Errors, Accounting Quality, Earnings Management

Suggested Citation

Amiram, Dan and Bozanic, Zahn and Rouen, Ethan, Financial Statement Errors: Evidence from the Distributional Properties of Financial Statement Numbers (August 2, 2015). Review of Accounting Studies, December 2015, Volume 20, Issue 4, pp 1540-1593. Available at SSRN: https://ssrn.com/abstract=2374093 or http://dx.doi.org/10.2139/ssrn.2374093

Dan Amiram (Contact Author)

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Zahn Bozanic

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Ethan Rouen

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-6275 (Phone)

HOME PAGE: http://www.ethanrouen.com

Paper statistics

Downloads
2,169
Rank
4,972
Abstract Views
10,753