Entropy 23 00557

entropy
Article
Reliability of Financial Information from the Perspective of
Benford’s Law
Ionel Jianu * and Iulia Jianu
Department of Accounting and Audit, The Bucharest University of Economic Studies,

010374 Bucharest, Romania; jianu.iulia@cig.ase.ro
* Correspondence: ionel.jianu@cig.ase.ro
Abstract: This study investigates the conformity to Benford’s Law of the information disclosed in
financial statements. Using the first digit test of Benford’s Law, the study analyses the reliability
of financial information provided by listed companies on an emerging capital market before and
after the implementation of International Financial Reporting Standards (IFRS). The results of the
study confirm the increase of reliability on the information disclosed in the financial statements
after IFRS implementation. The study contributes to the existing literature by bringing new insights
into the types of financial information that do not comply with Benford’s Law such as the amounts
determined by estimates or by applying professional judgment.
Keywords: Benford’s Law; reliability; IFRS; financial statements; emerging capital market
1. Introduction
The reliability of financial information is essential to ensure the credibility and sta-

bility of capital markets. The main aim of this paper is to test the reliability of financial
Citation: Jianu, I.; Jianu, I. Reliability information before and after IFRS implementation by listed companies on the Romanian
of Financial Information from the capital market. Romanian capital market, which is the main entrance for Foreign Direct
Perspective of Benford’s Law. Entropy
Investments (FDI), is becoming more and more attractive for international investors. The
2021, 23, 557. https://doi.org/
National Bank of Romania evaluated FDI stock on 31 December 2018 at 81.1 billion EUR,
10.3390/e23050557
with 57.5 billion EUR in equity positions. The European Commission had estimated that
the domestic economy was set to expand in 2019 by 3.3%. Meanwhile, the Eurozone was set
Academic Editor: Stanisław Drożdż
to grow by 1.2%, while the overall growth in the EU bloc would stand at 1.4% [1]. On this
backdrop, Romania will remain one of the economies with the fastest GDP expansion in
Received: 27 March 2021
Accepted: 29 April 2021
the region. For this reason, this research, which tests the reliability of financial information,
Published: 30 April 2021
is very important for potential international investors.
In order to test the reliability, it is recommended to use Benford’s Law, which is an
Publisher’s Note: MDPI stays neutral
old (1938) technique that had not been used for the last 20 years. For this reason, Mir
with regard to jurisdictional claims in
and Ausloos [2] called this technique the “Sleeping Beauty”. In the last two decades,
published maps and institutional affil- Benford’s Law has been used more and more in the accounting field to test the reliability of
iations. financial information. Over time, accounting has undergone continuous changes in order
to increase the relevance and credibility of information provided to investors. Throughout
the time, accounting has suffered continuous changes in order to increase the relevance
and reliability of information for investors. To what extent this desideratum has been
Copyright: © 2021 by the authors.
achieved, it is the purpose of this study, by testing the information presented in financial
Licensee MDPI, Basel, Switzerland.
statement by the Romanian companies listed on BSE, both before IFRS implementation
This article is an open access article
(when the national accounting regulations, issued by the Romanian Finance Minister, had
distributed under the terms and been applied by all companies operating in Romania) and after IFRS implementation
conditions of the Creative Commons (when the standards, issued by the International Accounting Standard Board, have become
Attribution (CC BY) license (https:// mandatory for all listed companies). The reliability testing was performed by using the
creativecommons.org/licenses/by/ first digit test of Benford’s Law, which compares the distribution of the first digit from
4.0/). the data set with the specific distribution of Benford’s Law. The testing was performed
Entropy 2021, 23, 557. https://doi.org/10.3390/e23050557 https://www.mdpi.com/journal/entropy

Entropy 2021, 23, 557 2 of 22
to the most important financial statements established by listed companies, respectively

balance sheets, income statements and cash-flows statements. Conformity to Benford’s
Law for the financial information means there is evidence that they do not contain errors
and therefore they accurately present the reality of transactions. Because not all types of
financial information are appropriate to be tested by Benford’s Law, the second aim of
this paper is to identify whether the amounts based on estimates or determined using
professional judgement conform or not to Benford’s Law.
Benford’s Law has its origin in the finding made by Newcomb (1881) [3], regarding
the fact that the first pages of logarithmic tables contain to a greater extent numbers that
have the smallest digits on the first position. Practically, independent of the finding, made
by Newcomb, but based on the same argument, Benford (1938) [4] went further, testing
in 20,000 observations collected from different articles, published in Reader’s Digest, the
probability of occurrence of numbers that begin with each digit “1, 2, . . . , 9”. Since the
publication of Benford’s Law, several mathematicians have presented various explanations
to support Benford’s Law, but without reaching a mathematical algorithm [5].
The use of Benford’s Law has proved effective in many fields: insurance [6],
databases [7,8]), economics [9,10], education [11], election [12], public administration [13],
real-estate [14], religion [15], statistical studies [16,17]. In the field of finance and account-
ing, Benford’s Law has been applied in audits to establish specific procedures [18] and to
identify potential frauds at the company level [19–23], as well as to combat tax evasion by
identification of companies that resort to manipulating the tax base, in order to be included
in a lower tax ceiling [24].
Certification of the reliability of information, disclosed in the companies’ financial
statements, through the use of Benford’s Law, has been performed on capital markets
of different countries: Hungary [25], India [26], Indonesia [27], Korea [28], Poland [29],
Romania [30], Russia [31], Taiwan [32], Turkey [33], UK [34] and USA [35,36].
Based on the importance of financial information, in the investment-making process
on the capital market, as well as in the evaluation of liquidity and solvency of compa-
nies by creditors, relevance and reliability of financial information are the fundamental
qualitative characteristics [37]. If previous studies validated the hypothesis that the infor-
mation presented by listed companies on Bucharest Stock Exchange (BSE) is relevant to
investors [38,39], this study would confirm that this information is also reliable.
Considering the need to ensure the comparability of accounting information in the era
of globalization, Romanian companies listed on the BSE have applied since 2012 the Inter-
national Financial Reporting Standards (IFRS). Most studies on the relevance of financial
information, performed at international level, have confirmed the superiority of the quality
of information presented according to IFRS, compared to national accounting regulations.
However, no study was performed to test whether the reliability of information, presented
under IFRS, is superior to that available under the national accounting regulations. The
results of this study confirm the increase of reliability after IFRS implementation for the
items tested from balance sheets and cash flows statements. In the case of income state-
ments, the increase of reliability after IFRS implementation was validated only in the case
of companies that record profits, but not in the case of companies that record losses.
The results of this study are useful to potential investors, as well as to regulatory bodies
that support the development process of the capital markets. This study can be a model
for testing the reliability of information presented in financial statements of companies
listed on international capital markets. The results of this study confirm the hypothesis
that Benford’s Law should not be applied to items presented in the financial statements
which are determined on the basis of estimates or calculated by applying the professional
judgment due to the complex accounting policies.
The rest of this paper is organized as follows: Section 2 covers the literature review,
Section 3 presents the research methodology, Section 4 discusses the descriptive statistics
and the results, Section 5 reports the conclusions.
Entropy 2021, 23, 557 3 of 22
2. Literature Review
The first use of Benford’s Law in the accounting field belongs to Carslaw (1988) [40],
which showed the tendency of managers to round up the profit reported by companies,
if they do not reach the targets set by analysts. Carslaw’s research was conducted based
on the financial data reported by New Zealand listed companies. The research conducted
by Thomas (1989) [41] followed. Using Benford’s Law to test the earnings per share of US
listed companies, Thomas confirmed the tendency of managers to round up earnings per
share when companies recorded profits and to round down earnings per share, respectively,
when companies recorded losses.
Nigrini [23,42] was the first researcher who used Benford’s Law in the process of
detecting abusive result manipulation practices. Nigrini’s research [43] expanded into the
field of taxation, in order to identify the companies that resorted to tax evasion practices,
by developing an index that measures the percentage by which a company deviates from
the correct tax base.
In a comparative analysis using the Benford’s Law, aiming to identify the effects of
the Sarbanex-Osley Act on US companies, the results suggest the existence of cosmetic
earnings management prior to the Act and the decrease of such behaviour after the Act [44].
The recession times affect the company activity and, for this reason, it is more difficult for
management to reach the analyst’s targets, the reason for which the financial statements
manipulation is larger around these time periods [45].
In order to identify the companies which are engaged in earnings management,
Johnson [46] tested different characteristics using Benford’s Law, resulting in three main
characteristics of these companies: capitalization below 45 billion, 3% levels of inside
trading, and less than 25 years on the capital market. In addition to the previous accrual
models used to identify the earnings manipulation, Lin et al. [47] found that, by using
Benford’s Law, the Fat Cat companies use more earnings management than the non-Fat
Cat companies, and for the latter, after they are declared to be Fat Cats, the earnings
management decreases. There are also authors who show that different models, such as
the Dechow model, are better than Benford’s Law in predicting the influence of earnings
management to the value relevance of accounting information [48].
The use of Benford’s Law has been extended to the fraud detection process. Referring
to the moment when the frauds are produced, Gava and de Souza Vitiello [21] showed
that it is more probable that they will occur in the first three quarters, because they will
be unnoticed compared to the situation in which they would have been recorded at the
end of the reporting period. The authors also showed that the likelihood of fraud, in
financial statements, is bigger in high inflation periods than in those with stable prices.
Replicating and extending the Debreceny and Gray [20] study on other dataset than
the US companies, Seow et al. [49] applied effectively Benford’s Law on journal entries,
emphasising the usefulness of this technique for cross-sectional digital analysis of fraud.
Due to the impossibility of Benford’s Law to answer the questions as “so-what”, they
recommended to supplement it by other methods tested to identify the fraud. The use of
Benford’s Law in fraud detection is not devoid of criticism, the most vehement being the
ones regarding the Type 1 errors (eg. Cleary and Thibodeau [50]).
Durtschi et al. [22] identified the types of fraud that auditors can detect by using
Benford’s Law in auditing financial statements, providing at the same time guidance on
the types of data and statistical tests which auditors should use. Applying Benford’s
Law in auditing the financial statements of a company from the medical industry, Asllani
and Naco [51] construct a useful methodology to be used by auditors in identifying the
categories of assets, liabilities, revenue and expenses which present a high risk of fraud in
accounting. In their recent article, Fay and Negangard [52] present a procedure of analysis
regarding the manual journal entries that could be used in the audit of financial statements
to identify the potential red flags of fraud using Benford’s Law. Intensifying the use of
Benford’s Law to some population of transactional data, Nigrini and Miller [53] provide a
new second-order test for differences between the ordered transactions.
Entropy 2021, 23, 557 4 of 22
Most studies conducted by using Benford’s Law to test the reliability of financial infor-
mation were done on the US and UK capital markets, based on accounting references, used
by the listed companies in those countries, i.e., Generally Accepted Accounting Principles
in the USA and IFRS in the UK. respectively. Using Benford’s Law, Archambault and
Archambault [54] examined the earnings management before the pre-SEC periods in both
regulated and unregulated industries, finding the presence of this practice in both types
of industries, but focused on different items from the financial statements (unregulated
industries managed gross revenue, net income, and accounts payable, while regulated
industries managed other income, property, plant and equipment and bonds payable).
The existence of the earnings management was also confirmed by Henselmann et al. [55],
the results showing that there is a high degree of deviation from Benford’s Law when the
earnings beat the analyst’s targets. In contrast, other authors found a contradictory result.
Therefore, Amiram et al. [35] found that financial statements of companies listed on the US
capital markets conform to Benford’s Law (the first digit test was performed). Nevertheless,
the amounts from income statements present larger variations from Benford’s Law than
those presented in the balance sheets or cash-flows statements.
Applying Benford’s Law on US capital markets, Nigrini [36] highlights the perfect
compliance of Benford’s Law in the case of stock returns, small deviations being registered
only in the volume of transactions due to the rounding of amounts. The application
of Benford’s Law proved to be useful in identifying variables that have the ability to
predict banks failure prediction [56]. Benford’s Law was also applied to analyse the
evolution of specific items presented in financial statements of the US listed companies, the
results of these studies emphasizing differences regarding the conformity to Benford’s Law,
between large and small companies, as well as between companies audited by Big 4 and
non-Big 4 [57].
Nguyen et al. [34] tested Benford’s Law in the case of companies listed on the UK
capital markets, finding the same results with Amiram et al. [35], regarding the conformity
to Benford’s Law, both at the market level and within the same company, through the
analysis of information over time. Furthermore, Nguyen et al. [34] identified the potential
causes of the deviations registered for amounts presented in the income statements, as
earnings manipulation and application of prudence principle.
3. Research Methodology
3.1. Research Model
Benford’s Law verifies the distribution of different sets of values. In order to test the
reliability of information disclosed in the financial statements of companies listed on BSE,
the first digit test of Benford’s Law was used. This test verifies the frequency of the digit
on the first position for the data set. According to the first digit test, the percentage of the
digits 1 to 9, which should appear on the first position of each number from the data set,
is presented in Table 1. It is considered that as long as the analysed numbers conform to
Benford’s Law, those numbers should be considered reliable for investors. The larger the
data set is, the more accurate the results obtained by applying Benford’s Law are. A number
of minimum 500 items is considered appropriate to apply Benford’s Law. Nevertheless,
there are studies which have shown that, even in the case of applying Benford’s Law on a
small number of data, of at least 50, it can be concluded that the results obtained could be
correct [58]. In this study, the tested data are numerical information contained in financial
statements of listed companies. Because the data set contains numbers that begin with
digits 1 to 9, the basic rule to apply Benford’s Law is respected.
Entropy 2021, 23, 557 5 of 22
Table 1. Benford’s Law: Expected Digits Frequencies.
Digit 1 2 3 4 5 6 7 8 9
Percentage 0.30103 0.17609 0.12494 0.09691 0.07918 0.06695 0.05799 0.05115 0.04576
3.2. Research Hypotheses

The first objective of this study was to test the reliability of information presented in
financial statements by companies listed on BSE. Since 2012, Romanian listed companies
have participated in an extensive process of transition from the application of national
accounting regulations to IFRS implementation. Taking into consideration the fact that IFRS
are considered to be a set of high quality standards, we expect the reliability of information
by IFRS implementation to be higher than that obtained by applying national accounting
regulations. The hypothesis of increasing the reliability of financial information after IFRS
implementation was verified using the first digit test of Benford’s Law for each of the most
important financial statements established by listed companies: balance sheet, income state-
ment and cash-flows statement. Based on the experiment of financial-accounting data and
capital markets, the previous studies demonstrated that in order to apply Benford’s Law,
the tested data should be extracted from a set of numbers that results from a combination
of numbers [22,59]. Consequently, in order to test the reliability of information disclosed
in the balance sheet, we used data calculated by the numerical combination “quantity *
price”, as in the case of “accounts receivable” and “accounts payable”. Similarly, to test
the reliability of information disclosed in the income statement, we used performance
indicators, calculated by the numerical combination “revenue expenses”, as in the case of
“net income”. In the end, to test the reliability of information disclosed in the cash-flows
statement, we used the performance indicators calculated by the numerical combination
“receipts payments”, as in the case of “cash from operating activities”. Therefore, to test
the reliability of information disclosed in each of the major financial statements by using
Benford’s Law, three hypotheses, which we expect to validate, were formulated:
Hypothesis 1. The reliability of information disclosed in the balance sheet increased after
IFRS implementation.
Hypothesis 2. The reliability of information disclosed in the income statement increased after
Hypothesis 3. The reliability of information disclosed in the cash-flows statement increased after
The second objective of this study was to confirm that Benford’s Law should not be
applied to test the items in financial statements, whose values are determined by estimates.
According to Nigrini and Mittermaier [18], Benford’s Law is not recommended to be
applied when human thought is involved. The financial statements items, most likely to
be influenced by the accountant’s professional judgment, are the depreciation expenses.
This happens because their calculation depends on many subjective aspects related to:
estimating the economic useful life of fixed assets, choosing the depreciation method
(which is influenced by the consumption of future economic benefits), and establishing the
residual value by estimating future gains generated by value recovery at the end of use.
Consequently, to confirm the rule that Benford’s Law should not be applied to test items
in financial statements, whose values are influenced by human thoughts, the following
hypothesis, which we expect to validate, was formulated:
Hypothesis 4. Distributions of the first digits of depreciation expenses reported in the income
statement do not follow Benford’s Law.
Entropy 2021, 23, 557 6 of 22
Testing this hypothesis will be based on data regarding the depreciation expenses
presented in the income statements of Romanian companies listed on BSE. The data, used to
test Benford’s Law, were calculated both in accordance with national accounting regulations
and IFRS.
The third objective of this study was to demonstrate that Benford’s Law should not be
applied to test the items assessed and recognised using complex accounting standards that
involve the use of extensive accountant’s professional judgment, which leads to different
practices of applying accounting regulations. An example, in this case, will occur if the
standard IFRS 15 “Revenue from contracts with customers” is applied. This is a very
complex standard regarding revenue recognition which involves the extensive use of the
accountant’s professional judgment. In order to verify this hypothesis, it was selected the
item “Revenue” from the income statement. Consequently, to demonstrate the fact that
Benford’s Law should not be applied to test items in financial statements, whose values are
assessed and recognised by using extensively the accountant’s professional judgment, the
following hypothesis, which we expect to validate, was formulated:
Hypothesis 5. Distributions of the first digits of revenue reported in the income statement after
IFRS implementation do not follow Benford’s Law.
We expect this hypothesis to be validated in the case of IFRS implementation and

invalidated when national accounting regulations were applied, because, in this last case,
there are very clear rules for revenue recognition. To strengthen the belief that Benford’s
Law should not be applied to test amounts calculated by using very complex accounting
treatments, but only the amounts calculated using clearly defined rules, the income tax
expenses were extracted from the data set in order to be analysed. This item was selected be-
cause the income tax expenses were calculated by applying the rules which are very clearly
defined in the Tax Code. In the case of income tax expenses, we expect the distributions of
first digits to follow Benford’s Law both before and after IFRS implementation.
3.3. Data Collection

In order to test the hypotheses, data published by Romanian companies listed on BSE
were used. The data were extracted from Thomson Reuters Eiken database. At the time of
data extraction (February 2019), 85 companies were listed on BSE. For a number of seven
companies, the data was unavailable, three companies presented data in a currency other
than the Romanian currency (RON), and three companies are banks (financial statements
for these companies have a different structure due to the specifics of their activity); therefore,
these 13 companies were eliminated from the study. Consequently, data from a number
of 72 companies were analysed. These companies present data from financial statements
starting with 1996 and until 2017. The companies listed on BSE after the year 1996 present
data starting with the year in which they were listed on BSE.
Because one of the research objectives was to test the reliability of information dis-
closed in income statements after IFRS implementation, data collected for each analysed
item was separated in two categories: items calculated and presented by companies before
IFRS implementation (when the national accounting regulations were applied) and after
IFRS implementation. For the majority of companies, the effective implementation of
IFRS was realized in 2012. For the year prior to effective application, in order to provide
comparative information, companies established financial statements, both according to
national accounting regulations and IFRS. Within the analysed companies, a number of
15 companies made the transition to IFRS earlier than 2012.
Nigrini [43] considers that data whose value is lower than 50 should be eliminated
from the analysis because they are immaterial and might introduce bias in the results.
Taking into consideration that data extracted from Thomson Reuters Eiken database are
expressed in thousands RON, when the first digit test was applied, in order to avoid the
cases when the first digit was obtained by rounding, the data of which amount is less than
10 were deleted.
Entropy 2021, 23, 557 7 of 22
Since the data used to test the conformity to Benford’s law for all digits are cate-
gorical data, the chi-square test was used to support the results, similarly with other
studies [20,54,60,61]. When the percentage distribution of data set is closer to the standard
Benford’s Law distribution, it is assumed that the reliability of financial information is
bigger. To explore the robustness of the results, the other tests were used to verify the
conformity to Benford’s Law, as the mean absolute deviation (MAD) and the Kolmogorov-
Smirnov (KS) test. The MAD does not depend on the sample size. For this reason, it is
recommended to be used for testing large data sets (more than dozens of thousands of data,
which is not the case of the present research). The KS test becomes more sensitive as data
series grow. Therefore, the KS test is most appropriate to test the conformity to Benford’s
Law for small data sets. Given that the number of observations used in this research to
test compliance to Benford’s Law varies between 93 and 686 observations, Chi-square was
chosen to test the first digits for all observations, at a confidence level of 95%. In order to
test the conformity to each digit, Z test was used, similarly with other studies [28,40,62,63].
4. Results
The analysis of the reliability of information disclosed in the balance sheets of the
companies listed on BSE was performed by applying the first digit test of Benford’s Law to
the amounts of “Accounts receivable”, presented in the assets category, and to the amounts
of “Accounts payable”, presented in the liability category. Both items respected the rule
imposed by Benford’s Law, which involves to test the numbers that result from a numerical
combination: “quantity sold * selling price” in the case of accounts receivable, respectively,
“quantity purchased * purchasing price” in the case of accounts payable. Because the IFRS
are considered a set of high quality standards at the international level, in order to verify
if IFRS implementation increased the reliability of information disclosed in the balance
sheets, data would be divided in two categories: before IFRS implementation and after
IFRS implementation. The results obtained for the balance sheet items, tested by Benford’s
Law, are presented in Figure 1 for the item “Accounts receivable” and in Figure 2 for the
item “Accounts payable”. The figures present the results both before IFRS implementation
and after IFRS implementation.
From the analysis of the first digit test, it is observed that the items “Accounts re-
ceivable” and “Accounts payable” conform to Benford’s Law both before and after IFRS
implementation, at 5% level (critical value of Chi-Square 15.5073). The first digit of data,
after IFRS implementation, conforms to Benford’s Law for accounts receivable (Chi-Square
10.1538) and accounts payable (Chi-Square 6.6219), more closely than the first digit before
IFRS implementation for accounts receivable (Chi-Square 12.9442) and accounts payable
(Chi-Square 7.1375). This suggests that assets and liabilities disclosed in the balance sheets
of the companies listed on BSE are more reliable after IFRS implementation than before
IFRS implementation. Analysing Z-score for each specific first digit, there is no significant
difference from Benford’s Law for any of the first digit of the accounts receivable and
accounts payable amounts, at 5% level. Taking into consideration the results obtained
from the analysis of accounts receivable and accounts payable, we validate the Hypoth-
esis 1 that the reliability of information disclosed in the balance sheet increased after
Entropy 2021, 23, x FOR PEER REVIEW 8 of 21
Entropy 2021, 23, 557 8 of 22
Figure
Figure 1.1. Accounts
Accounts receivable.
receivable. The
The figure
figure shows
shows the conformity to
the conformity Benford’s Law
to Benford’s Law of of Accounts
Accounts Receivable
Receivable in in accordance
accordance
with Chi-square test, both before and after IFRS implementation. Score based on Chi-Square
with Chi-square test, both before and after IFRS implementation. Score based on Chi-Square of 12.9442 (p-value 0.11) beforeof 12.9442 (p-value 0.11)
before IFRS implementation and 10.1538 (p-value 0.25) after IFRS implementation is lower than the
IFRS implementation and 10.1538 (p-value 0.25) after IFRS implementation is lower than the critical value of 15.5073 at 5% critical value of 15.5073
at 5% level. Data set columns represents the observed percentages of the first digits and BL columns represents Benford’s
level. Data set columns represents the observed percentages of the first digits and BL columns represents Benford’s Law
Law expected percentages of the first digits. Before IFRS implementation, the absolute maximum score (AMS) of 0.0415
expected percentages of the first digits. Before IFRS implementation, the absolute maximum score (AMS) of 0.0415 based on
based on Kolmogorov-Smirnov is lower than the test value of 0.0532 at 5% level for 654 observations; after IFRS imple-
Kolmogorov-Smirnov
mentation, the AMS ofis0.0206,
lower than
based theontest value of 0.0532 at 5% is
Kolmogorov-Smirnov, level for than
lower 654 observations;
the test value after IFRS implementation,
of 0.0611 at 5% level for 495 the
AMS of 0.0206,this
observations; based on Kolmogorov-Smirnov,
shows the conformity to Benford’s is lower Lawthan the test value Receivable
of Accounts of 0.0611 at in5%accordance
level for 495withobservations;
Kolmogorov- this
shows thetest,
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both before and afterLawIFRS ofimplementation.
Accounts Receivable Scoreinbased
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mean Kolmogorov-Smirnov
absolute deviation (MAD) test, both before
of 0.0143
before IFRS
and after IFRSimplementation
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0.0135basedafteronIFRS
the implementation is lower (MAD)
mean absolute deviation than 0.0150 (MAD
of 0.0143 bigger
before IFRSthan 0.0150 shows
implementation
the
andnonconformity
0.0135 after IFRS to implementation
Benford’s Law in is accordance with Nigrini
lower than 0.0150 (MAD [64]).
biggerStandard deviation
than 0.0150 shows ofthedifferences
nonconformity between data set
to Benford’s
and
Law in accordance with Nigrini [64]). Standard deviation of differences between data set and Benford’s Law distributions is
Benford’s Law distributions is 1.39% before IFRS implementation and 0.92% after IFRS implementation. Z-Score is
calculated
1.39% before forIFRS
eachimplementation
digit, similarly with the studies
and 0.92% of Lacina
after IFRS et al. [28], Carslaw
implementation. Z-Score[40], Costa et al.
is calculated for[62]
eachand Santos
digit, et al. with
similarly [63].
the studies of Lacina et al. [28], Carslaw [40], Costa et al. [62] and Santos et al. [63].
Entropy 2021, 23, 557 9 of 22
Figure 2.2. Accounts

Accounts payable. The figure shows the conformity to Benford’s Law of Accounts Accounts Payable in accordance
accordance with
with
Chi-square test,
Chi-square test, both
bothbefore
beforeand
andafter
afterIFRS
implementation. Score based
Score on Chi-Square
based on Chi-Square of 7.1375 (p-value
of 7.1375 0.52)0.52)
(p-value before IFRS
before
implementation
IFRS implementation and 6.6219 (p-value
and 6.6219 0.58) after
(p-value 0.58) IFRS
after implementation
IFRS implementation is lower than the
is lower thancritical value value
the critical of 15.5073 at 5% at
of 15.5073 level.
5%
Data set columns represents the observed percentages of the first digits and BL columns represents
level. Data set columns represents the observed percentages of the first digits and BL columns represents Benford’s Law Benford’s Law ex-
pected percentages of the first digits. Before IFRS implementation, the absolute maximum score (AMS) of 0.0491 based on
Kolmogorov-Smirnov is lower than the test value of 0.0554 at 5% level for 602 observations; after IFRS implementation,
Kolmogorov-Smirnov is lower than the test value of 0.0554 at 5% level for 602 observations; after IFRS implementation, the
the AMS of 0.0228, based on Kolmogorov-Smirnov, is lower than the test value of 0.0642 at 5% level for 449 observations
AMS of 0.0228,
this shows based on Kolmogorov-Smirnov,
the conformity to Benford’s Law of Accountsis lower than the test
Payable value of 0.0642
in accordance with at 5% level for 449 observations
Kolmogorov-Smirnov test, boththis
be-
shows
fore andtheafter
conformity to Benford’s Law
IFRS implementation. of Accounts
Score based onPayable
the mean in absolute
accordance with Kolmogorov-Smirnov
deviation (MAD) of 0.0109 before test,IFRS
both implemen-
before and
after
tationIFRS
andimplementation.
0.0095 after IFRSScore based on theismean
implementation lowerabsolute deviation
than 0.0150 (MAD(MAD)
biggerofthan
0.0109 before
0.0150 IFRSthe
shows implementation
nonconformity and
to
Benford’s
0.0095 afterLaw
IFRSinimplementation
accordance with Nigrini
is lower [64]).
than Standard
0.0150 (MADdeviation
bigger than of 0.0150
differences
showsbetween data set and
the nonconformity to Benford’s
Benford’s Law
distributions
in accordanceiswith 1.58% before
Nigrini IFRSStandard
[64]). implementation
deviation and 0.87% after between
of differences IFRS implementation. Z-Score isLaw
data set and Benford’s calculated for each
distributions is
digit, similarly
1.58% before IFRSwith the studies of and
implementation Lacina et al.
0.87% [28],
after Carslaw
IFRS [40], Costa et
implementation. al. [62]isand
Z-Score Santos for
calculated et al. [63].
each digit, similarly with
The analysis of the reliability of information disclosed in the income statements of
the companies
The analysislisted on reliability
of the BSE was performed by applying
of information disclosedtheinfirst
the digit
incometeststatements
of Benford’s of
Law to the amounts
the companies listedofon
“Net
BSEincome”, calculated
was performed byby difference
applying thebetween
first digittotal
testrevenues
of Benford’sand
total
Law expenses, recorded
to the amounts during
of “Net the financial
income”, year. Taking
calculated into consideration
by difference between total therevenues
fact that
net
andincome can be positive
total expenses, recorded when revenues
during are bigger
the financial than
year. expenses
Taking (in this case the
into consideration thecom-
fact
pany obtained
that net incomeprofit)
can beorpositive
negative whenrevenues
when revenuesarearebigger
lowerthan
thanexpenses
expenses (in(in this
this case
case the
company obtained
obtained profit)
a loss),orthe
negative when
data set wasrevenues
divided inaretwo
lower than expenses
categories: positive(in amounts
this case
the company
versus obtained
negative a loss),
amounts. Thistheseparation
data set was divided inwhen
is imposed two categories:
Benford’s positive
Law testamounts
is used
versus negative
because amounts.
the incentive This separation
to manipulate is imposed
the earnings will bewhen Benford’s
different Law test obtains
if the company is used
profit or loss. Therefore, if the company has obtained profit, the incentive would be to
Entropy 2021, 23, 557 10 of 22
because the incentive to manipulate the earnings will be different if the company obtains
profit or loss. Therefore, if the company has obtained profit, the incentive would be to
increase the amount of profit, but if the company has obtained a loss, the incentive would
be to decrease the amount of loss, in order to be very close to zero. Because the objective
of this study is to test the reliability of financial information after IFRS implementation,
the data which reflect the amounts of profit, respectively the amounts of loss, were also
divided in two categories: before and after IFRS implementation. The results obtained by
testing the data are presented in Figure 3 for the amounts expressing the profit before and
after IFRS implementation, and in Figure 4 for the amounts expressing the loss before and
after IFRS implementation.
From the analysis of the first digit test, it is observed that the item “Net income”
conforms to Benford’s Law both before and after IFRS implementation, at 5% level (critical
value of Chi-Square 15.5073). The first digit of profit amounts after IFRS implementation
conforms to Benford’s Law (Chi-Square 7.3784) more closely than the first digit before
IFRS implementation (Chi-Square 8.7040). On the contrary, the first digit of loss before
IFRS implementation (Chi-Square 7.9736) conforms to Benford’s Law more closely than
the first digit after IFRS implementation (Chi-Square 9.6632). This indicates that the
amounts disclosed in the income statements of the companies listed on BSE are more
reliable after IFRS implementation than before IFRS implementation, when companies
obtained profit, but not in the case when companies obtained losses. Analyzing Z-scores
for each specific first digit, it is highlighted the fact that there are significant differences
from Benford’s Law for digit 1 when the companies obtained losses, both before and after
IFRS implementation, at 5% level (critical value of Z-score 1.96). The main reason for these
differences is the small number of observations available in the case of negative amounts
for net income (93 observations before IFRS implementation and 138 observations after
IFRS implementation). Taking into consideration the results obtained from the analysis of
the amounts of net income, we validate the Hypothesis 2 that the reliability of information
disclosed in the income statement increased after IFRS implementation, only for positive
amounts of net income, but not for negative amounts of net income. We could conclude
that the reliability of information disclosed in income statements increased after IFRS
implementation only for the profitable companies.
The analysis of the reliability of information disclosed in the cash-flows statements of
the companies listed on BSE was performed by applying the first digit test of Benford’s
Law to the item named “Cash from operating activities” which is one of the most impor-
tant indicators used by investors to evaluate the liquidity of the company. Taking into
consideration that cash-flows from operating activities are calculated as a difference be-
tween receipts and payments, there is the possibility for this indicator to be negative when
payments are bigger than receipts. Because previous studies have shown that the tendency
to manipulate accounting data is different in the case of negative values compared to
positive ones, in order to verify if the reliability of information disclosed in the cash-flows
statements increased after IFRS implementation, the results are presented in Figure 5 for
positive amounts of cash-flows and in Figure 6 for negative amounts of cash-flows.
From the analysis of the first digit test, it is observed that the item “Cash from operating
activities” conforms to Benford’s Law both before and after IFRS implementation, at 5%
level (critical value of Chi-Square 15.5073). The first digit of positive and negative amounts
of cash-flows from operations after IFRS implementation (Chi-Square 6.4150 for positive
amounts and Chi-Square 10.3184 for negative amounts) conforms to Benford’s Law more
closely than the first digit before IFRS implementation (Chi-Square 6.9925 for positive
amounts and Chi-square 12.461 for negative amounts). This indicates that positive and
negative amounts of cash-flows from operations, disclosed in the cash-flows statements of
the companies listed on BSE, are more reliable after IFRS implementation than before IFRS
implementation. Analysing Z-score for each specific first digit, it is highlighted the fact that
there are significant differences from Benford’s Law for digit 2 of the negative amounts
of cash-flows before IFRS implementation, at 5% level (critical value of Z-score 1.96). The
Entropy 2021, 23, 557 11 of 22

increase the amount of profit, but if the company has obtained a loss, the incentive would
be to decrease the amount of loss, in order to be very close to zero. Because the objective
main
of thisreason
study for this
is to difference
test is the of
the reliability small number
financial of data available
information for implementation,
after IFRS testing negative
amounts
the of cash-flows
data which fromamounts
reflect the operations (156 observations
of profit, respectivelybefore IFRS implementation
the amounts and
of loss, were also
132 observations
divided after IFRS before
in two categories: implementation).
and after IFRSTaking into consideration
implementation. The the results
results obtained
obtained by
from the
testing theanalysis
data areof positive in
presented and negative
Figure 3 for amounts
the amounts of cash-flows
expressingfrom operations,
the profit we
before and
validate
after IFRSthe Hypothesis 3 that
implementation, and the reliability
in Figure 4 for of
theinformation disclosedthe
amounts expressing in loss
the cash-flows
before and
statement increased after
after IFRS implementation. IFRS implementation.
Figure 3.
Figure 3. Positive
Positive amounts
amounts of of Net
Net income
income (Profit).
(Profit). This
This figure shows the
figure shows the conformity
conformity to to Benford’s
Benford’s Law
Law of
of positive
positive amounts
amounts
of Net Income in accordance with Chi-square test, both before and after IFRS implementation. Score
of Net Income in accordance with Chi-square test, both before and after IFRS implementation. Score based on Chi-Square of based on Chi-Square
of 8.7040 (p-value 0.37) before IFRS implementation and 7.3784 (p-value 0.50) after IFRS implementation is lower than the
8.7040 (p-value 0.37) before IFRS implementation and 7.3784 (p-value 0.50) after IFRS implementation is lower than the
critical value of 15.5073 at 5% level. Data set columns represents the observed percentages of the first digits and BL col-
critical value of 15.5073 at 5% level. Data set columns represents the observed percentages of the first digits and BL columns
umns represents Benford’s Law expected percentages of the first digits. Before IFRS implementation, the absolute maxi-
represents
mum scoreBenford’s
(AMS) ofLaw expected
0.0328 based percentages of the first digits.
on Kolmogorov-Smirnov Beforethan
is lower IFRStheimplementation, the absolute
test value of 0.0560 maximum
at 5% level for 589score
ob-
(AMS) of 0.0328 based on Kolmogorov-Smirnov is lower than the test value of 0.0560 at 5%
servations; after IFRS implementation, the AMS of 0.0348, based on Kolmogorov-Smirnov, is lower than the test valuelevel for 589 observations; after
of
IFRS
0.0698implementation,
at 5% level for 380the observations;
AMS of 0.0348, based
this showson the
Kolmogorov-Smirnov,
conformity to Benford’s is lowerLaw than the test value
of positive amountsof 0.0698
of NetatIncome
5% levelin
accordance
for with Kolmogorov-Smirnov
380 observations; test, bothto
this shows the conformity before and after
Benford’s LawIFRS implementation.
of positive amounts of Score
Netbased
Income onin
theaccordance
Mean Absolute
with
Deviation (MAD) of 0.0113
Kolmogorov-Smirnov before
test, both IFRSand
before implementation and 0.0111 after
after IFRS implementation. IFRS
Score implementation
based on the Mean is lower than
Absolute 0.0150(MAD)
Deviation (MAD
bigger
of 0.0113than 0.0150
before IFRSshows the nonconformity
implementation and 0.0111 to after
Benford’s Law in accordance
IFRS implementation withthan
is lower Nigrini [64]).
0.0150 Standard
(MAD biggerdeviation
than 0.0150 of
differences between data set and Benford’s Law distributions is 0.49% before IFRS implementation
shows the nonconformity to Benford’s Law in accordance with Nigrini [64]). Standard deviation of differences between data and 0.81% after IFRS
implementation. Z-Score is calculated for each digit, similarly with the studies of Lacina et al. [28], Carslaw [40], Costa et
set and Benford’s Law distributions is 0.49% before IFRS implementation and 0.81% after IFRS implementation. Z-Score is
al. [62] and Santos et al. [63].
calculated for each digit, similarly with the studies of Lacina et al. [28], Carslaw [40], Costa et al. [62] and Santos et al. [63].
Entropy 2021, 23, 557 12 of 22
Figure 4. Negative
Negative amounts of Net income income (Loss). The The figure
figure shows
shows the conformity
conformity to Benford’s Law of negative amounts
of
of Net Income in
Net Income in accordance
accordancewith withChi-square
Chi-squaretest,test,both
bothbefore
beforeand
andafter
afterIFRS
IFRSimplementation.
implementation. Score
Score based
based onon Chi-Square
Chi-Square of
of 7.9736
7.9736 (p-value
(p-value 0.44)
0.44) before
before IFRS
IFRS implementationand
implementation and9.6632
9.6632(p-value
(p-value0.29)
0.29)after
afterIFRS
IFRSimplementation
implementation is is lower
lower than
than the
the
critical value of
critical value of 15.5073
15.5073atat5%5%level.
level.Data
Dataset
setcolumns
columns represents
represents thethe observed
observed percentages
percentages of the
of the firstfirst digits
digits and and BL col-
BL columns
umns represents Benford’s Law expected percentages of the first digits. Before IFRS implementation, the absolute maxi-
represents Benford’s Law expected percentages of the first digits. Before IFRS implementation, the absolute maximum score
mum score (AMS) of 0.0860 based on Kolmogorov-Smirnov is lower than the test value of 0.1410 at 5% level for 93 obser-
(AMS) of 0.0860 based on Kolmogorov-Smirnov is lower than the test value of 0.1410 at 5% level for 93 observations; after
vations; after IFRS implementation, the AMS of 0.0685, based on Kolmogorov-Smirnov, is lower than the test value of
IFRS implementation,
0.1158 at 5% level for 138theobservations;
AMS of 0.0685, based
this shows onthe
Kolmogorov-Smirnov,
conformity to Benford’s is lower
Lawthan the test value
of negative amounts of 0.1158
of NetatIncome
5% level
in
for 138 observations; this shows the conformity to Benford’s Law of negative amounts of Net
accordance with Kolmogorov-Smirnov test, both before and after IFRS implementation. Score based on the Mean Absolute Income in accordance with
Kolmogorov-Smirnov
Deviation (MAD) of 0.0277test, both before
before IFRSand after IFRS implementation.
implementation and 0.0266 afterScore
IFRSbased on the MeanisAbsolute
implementation bigger thanDeviation
0.0150 (MAD)
(MAD
bigger
of 0.0277than 0.0150
before IFRS shows the nonconformity
implementation and 0.0266 to after
IFRS implementation with than
is bigger Nigrini [64]).
0.0150 (MADStandard
biggerdeviation of
than 0.0150
differences between data to
shows the nonconformity setBenford’s
and Benford’s
Law inLaw distributions
accordance is 2.41%[64]).
with Nigrini before IFRS implementation
Standard and 1.89%
deviation of differences after IFRS
between data
implementation.
set and Benford’sZ-Score is calculated
Law distributions for each
is 2.41% digit,IFRS
before similarly with the studies
implementation of Lacina
and 1.89% after et al. [28],
IFRS Carslaw [40],Z-Score
implementation. Costa etis
From the analysis of the first digit test, it is observed that the item “Net income”
conforms to Benford’s Law both before and after IFRS implementation, at 5% level (critical
value of Chi-Square 15.5073). The first digit of profit amounts after IFRS implementation
conforms to Benford’s Law (Chi-Square 7.3784) more closely than the first digit before
IFRS implementation (Chi-Square 8.7040). On the contrary, the first digit of loss before
IFRS implementation (Chi-Square 7.9736) conforms to Benford’s Law more closely than
the first digit after IFRS implementation (Chi-Square 9.6632). This indicates that the
amounts disclosed in the income statements of the companies listed on BSE are more re-
liable after IFRS implementation than before IFRS implementation, when companies ob-
tained profit, but not in the case when companies obtained losses. Analyzing Z-scores for
Entropy 2021, 23, 557 13 of 22
Figure 5. Positive
Positivecash-flows
cash-flowsfrom fromoperating
operating activities. TheThe
activities. figure shows
figure the conformity
shows the conformityto Benford’s Law of
to Benford’s Lawpositive Cash-
of positive
flows from operating
Cash-flows activities
from operating in accordance
activities with Chi-square
in accordance with Chi-squaretest, both
test,before and after
both before andIFRS
afterimplementation.
IFRS implementation. Score based
Score
on Chi-Square
based of 6.9925
on Chi-Square (p-value
of 6.9925 0.54) 0.54)
(p-value before IFRSIFRS
before implementation
implementation andand
6.4150 (p-value
6.4150 0.60)
(p-value after
0.60) IFRS
after IFRSimplementation
implementation is
lower
is lowerthan thethe
than critical value
critical of 15.5073
value at 5%
of 15.5073 at level. DataData
5% level. set columns represents
set columns the observed
represents percentages
the observed of the of
percentages first
thedigits
first
and BL columns represents Benford’s Law expected percentages of the first digits. Before IFRS implementation, the abso-
digits and BL columns represents Benford’s Law expected percentages of the first digits. Before IFRS implementation, the
lute maximum score (AMS) of 0.0330 based on Kolmogorov-Smirnov is lower than the test value of 0.0717 at 5% level for
absolute maximum score (AMS) of 0.0330 based on Kolmogorov-Smirnov is lower than the test value of 0.0717 at 5% level
360 observations; after IFRS implementation, the AMS of 0.0435, based on Kolmogorov-Smirnov, is lower than the test
for
value360ofobservations;
0.0701 at 5% after
levelIFRS implementation,
for 376 observations; thisthe AMS
showsofthe0.0435, based on
conformity to Kolmogorov-Smirnov,
Benford’s Law of positive is lower than thefrom
Cash-flows test
value of 0.0701 at 5% level for 376 observations; this shows the conformity to Benford’s Law of
operating activities in accordance with Kolmogorov-Smirnov test, both before and after IFRS implementation. Score based positive Cash-flows from
operating
on the mean activities
absolutein accordance with Kolmogorov-Smirnov
deviation (MAD) of 0.0137 before IFRS test, both before and
implementation after
and IFRS after
0.0110 implementation. Score based
IFRS implementation is
lower
on the than
mean0.0150 (MAD
absolute bigger(MAD)
deviation than 0.0150 shows
of 0.0137 the IFRS
before nonconformity
implementationto Benford’s Lawafter
and 0.0110 in accordance with Nigrini
IFRS implementation [64]).
is lower
Standard
than 0.0150deviation
(MAD biggerof differences between
than 0.0150 showsdata set and Benford’s
the nonconformity Law distributions
to Benford’s is 1.12% before
Law in accordance IFRS implementation
with Nigrini [64]). Standard
and 0.83% after IFRS implementation. Z-Score is calculated for each digit, similarly with
deviation of differences between data set and Benford’s Law distributions is 1.12% before IFRS implementation the studies of Lacina andet al.0.83%
[28],
Carslaw [40], Costa et al. [62] and Santos et al. [63].
after IFRS implementation. Z-Score is calculated for each digit, similarly with the studies of Lacina et al. [28], Carslaw [40],
Costa et al. [62] and Santos et al. [63].
Entropy 2021, 23, 557 14 of 22
Figure 6. 6. Negative
Negativecash-flows
cash-flowsfrom fromoperating
operating activities. The
activities. figure
The shows
figure the the
shows conformity
conformityto Benford’s Law of
to Benford’s Lawnegative Cash-
of negative
Cash-flows from operating
flows from operating activities
activities in accordance
in accordance with Chi-square
with Chi-square test,before
test, both both before andIFRS
and after afterimplementation.
IFRS implementation. Score
Score based
based on Chi-Square
on Chi-Square of 12.461of 12.461
(p-value(p-value 0.13) before
0.13) before IFRS implementation
IFRS implementation and 10.3184
and 10.3184 (p-value
(p-value 0.24) IFRS
0.24) after after IFRS implemen-
implementation
tation is lower than the critical value of 15.5073 at 5% level. Data set columns represents the
is lower than the critical value of 15.5073 at 5% level. Data set columns represents the observed percentages of the observed percentages offirst
the
first digits and BL columns represents Benford’s Law expected percentages of the first digits. Before
digits and BL columns represents Benford’s Law expected percentages of the first digits. Before IFRS implementation, the IFRS implementation,
the absolute maximum score (AMS) of 0.1095 based on Kolmogorov-Smirnov is bigger than the test value of 0.1089 at 5%
absolute maximum score (AMS) of 0.1095 based on Kolmogorov-Smirnov is bigger than the test value of 0.1089 at 5% level
level for 156 observations; after IFRS implementation, the AMS of 0.0949, based on Kolmogorov-Smirnov, is lower than
for 156 observations; after IFRS implementation, the AMS of 0.0949, based on Kolmogorov-Smirnov, is lower than the test
the test value of 0.1184 at 5% level for 132 observations; this shows the conformity to Benford’s Law of negative Cash-
value of 0.1184
flows from at 5% level
operating for 132
activities observations;
in accordance withthis shows the conformity
Kolmogorov-Smirnov to only
test Benford’s Law implementation.
after IFRS of negative Cash-flows from
Score based
operating
on the mean activities in accordance
absolute deviation (MAD)with Kolmogorov-Smirnov
of 0.0244 before IFRS testimplementation
only after IFRS implementation.
and 0.0214 after Score
IFRS based on the mean
implementation is
absolute
bigger deviation
than 0.0150 (MAD) of 0.0244
(MAD bigger before
than IFRS
0.0150 implementation
shows and 0.0214
the nonconformity after IFRSLaw
to Benford’s implementation
in accordance is with
bigger than 0.0150
Nigrini [64]).
Standard
(MAD deviation
bigger of differences
than 0.0150 shows the between data set and
nonconformity Benford’s
to Benford’s Law
Law indistributions
accordance with is 2.44% before
Nigrini IFRS
[64]). implementation
Standard deviation
and 2.29% after
of differences IFRS implementation.
between Z-ScoreLaw
data set and Benford’s is calculated for is
distributions each digit,
2.44% similarly
before with the studiesand
IFRS implementation of Lacina
2.29% et al. IFRS
after [28],
Carslaw [40], Costa et al. [62] and Santos et al. [63].
implementation. Z-Score is calculated for each digit, similarly with the studies of Lacina et al. [28], Carslaw [40], Costa
et al. [62] and Santos et al. [63].
The second objective of this study was to demonstrate that Benford’s Law should not
be applied in testing
The second the values
objective of thiscalculated
study wasbased on estimates.
to demonstrate thatThe item selected
Benford’s to test not
Law should the
nonconformity to Benford’s
be applied in testing the valuesLaw for thesebased
calculated typeson of estimates.
values wasThe “Depreciation
item selectedexpenses”.
to test the
This item was selected
nonconformity due toLaw
to Benford’s the large number
for these typesofofestimates
values wasmade to determineexpenses”.
“Depreciation the value
of depreciation,
This amongdue
item was selected which
to thewe mention:
large number estimating
of estimatesthemade
economic useful life
to determine theto deter-
value of
mine the depreciation
depreciation, among whichperiodweof time, estimating
mention: estimatinghow future economic
the economic benefits
useful life will be
to determine
the depreciation
consumed period of
to determine time,
the estimatingmethod,
depreciation how future economic
estimating thebenefits
residualwill be consumed
value of the as-
to determine
set at the end of theuseful
depreciation method, the
life to determine estimating
depreciablethe residual
amount, value of thethe
estimating asset at the
recovera-
endvalue
ble of useful lifeasset
if the to determine
is impaired,the depreciable
estimating amount, estimating
the fair value if thethe recoverable
asset value
is revalued. Theif
the asset is impaired, estimating the fair value if the asset is revalued.
depreciation expenses, extracted from the income statements of the companies listed on The depreciation
Entropy 2021, 23, 557 15 of 22
expenses, extracted from the income statements of the companies listed on BSE, were
divided
BSE, in divided
were two categories: before and after
in two categories: beforeIFRS
andimplementation. The results obtained
after IFRS implementation. by
The results
applying the first digit test are presented in Figure 7.
obtained by applying the first digit test are presented in Figure 7.
Figure 7. Depreciation
Depreciationexpenses.
expenses.The Thefigure
figure shows
shows thethe
nonconformity
nonconformity to to
Benford’s
Benford’s LawLawof Depreciation
of Depreciation Expenses
Expensesin ac-
in
cordance with Chi-square test, both before and after IFRS implementation. Score based on Chi-Square
accordance with Chi-square test, both before and after IFRS implementation. Score based on Chi-Square of 30.9911 of 30.9911 (p-value
0.00)
0.00) before
before IFRS
IFRS implementation
implementation and and 27.6322
27.6322 (p-value
(p-value 0.00)
0.00) after
after IFRS
IFRS implementation
implementation is is bigger
bigger thanthan the
the critical
critical value
value ofof
15.5073 at 5% level. Data set columns represents the observed percentages of the first digits and
15.5073 at 5% level. Data set columns represents the observed percentages of the first digits and BL columns represents BL columns represents
Benford’s Law expected percentages of the first digits. Before IFRS implementation, the absolute maximum score (AMS)
Benford’s Law expected percentages of the first digits. Before IFRS implementation, the absolute maximum score (AMS)
of 0.0708 based on Kolmogorov-Smirnov is bigger than the test value of 0.0542 at 5% level for 630 observations; after IFRS
of 0.0708 based on Kolmogorov-Smirnov is bigger than the test value of 0.0542 at 5% level for 630 observations; after
implementation, the AMS of 0.0669, based on Kolmogorov-Smirnov, is bigger than the test value of 0.0646 at 5% level for
IFRSobservations;
443 implementation, the AMS
this shows of 0.0669, basedtoon
the nonconformity Kolmogorov-Smirnov,
Benford’s Law of Depreciation is bigger than the
Expenses test value of
in accordance 0.0646
with at 5%
Kolmogo-
level for 443 observations;
rov-Smirnov test, both beforethis shows
and afterthe
IFRSnonconformity
implementation. to Benford’s
Score based LawonoftheDepreciation
mean absolute Expenses
deviation in accordance
(MAD) of 0.0201with
Kolmogorov-Smirnov
before test, both
IFRS implementation andbefore
0.0241and after
after IFRS
implementation Score based
is bigger on the(MAD
than 0.0150 mean absolute deviation
bigger than 0.0150 (MAD)
shows
the nonconformity
of 0.0201 before IFRS toimplementation
and 0.0241 afterwith Nigrini
IFRS [64]). Standard
implementation deviation
is bigger of differences
than 0.0150 between
(MAD bigger thandata set
0.0150
and
showsBenford’s Law distributions
the nonconformity is 1.47%
to Benford’s Law before IFRS implementation
in accordance with Nigrini [64]).andStandard
2.59% after IFRS implementation.
deviation Z-Score
of differences between datais
calculated for each digit, similarly with the studies of Lacina et al. [28], Carslaw [40], Costa et al.
set and Benford’s Law distributions is 1.47% before IFRS implementation and 2.59% after IFRS implementation. Z-Score is[62] and Santos et al. [63].
From the analysis of differences between the distribution of the first digit of the item
“Depreciation Expenses”
From the analysis from all setbetween
of differences of data and the standardofdistribution
the distribution the first digitofofBenford’s
the item
Law results that the differences are significant at 5% level (critical value of
“Depreciation Expenses” from all set of data and the standard distribution of Benford’s Chi-Square
15.5073), both
Law results before
that and after IFRS
the differences implementation.
are significant at 5% The
levelfirst digitvalue
(critical of dataof before IFRS
Chi-Square
implementation does not
15.5073), both before andconform to Benford’s
after IFRS Law (Chi-Square
implementation. 30.9911),
The first digit even
of data if only
before for
IFRS
a single digit, respectively digit 2, the conformity to Benford’s Law seems not to be re-
spected. Regarding the data after IFRS implementation, the first digit for all data does not
Entropy 2021, 23, 557 16 of 22
implementation does not conform to Benford’s Law (Chi-Square 30.9911), even if only
for a single digit, respectively digit 2, the conformity to Benford’s Law seems not to be
respected. Regarding the data after IFRS implementation, the first digit for all data does not
conform to Benford’s Law (Chi-Square 27.6322), even if each digit analysed individually
conforms to Benford’s Law at 5% level. Taking into consideration the results obtained, we
validate the Hypothesis 4 that the distributions of the first digits of depreciation expenses
reported in income statements do not follow Benford’s Law. We could conclude that the
values reported in the financial statements based on estimates do not seem to conform to
Benford’s Law.
The third objective of this study was to test if the extensive professional judgement
used in IFRS impacts on the application of Benford’s Law. IFRS 15, which is the standard
for revenue recognition, is considered to have a high degree of complexity [65]. Its imple-
mentation requires the use of professional judgment by accountants, which can lead to
various revenue recognition practices for companies applying IFRS. These practices can
affect the revenue amounts recognized in the income statement, leading to non-compliance
with Benford’s Law. The testing of this hypothesis was performed by analysing the way
in which the revenues recognized in the income statements of companies listed on BSE
comply with Benford’s Law after IFRS implementation. To strengthen the way in which
the extensive professional judgement used in IFRS affects the application of Benford’s Law,
we also applied the test for the income tax expenses. In the case of income tax expenses,
there are very strict rules for calculating the amount of income tax, and therefore, we
expect that these amounts to conform to Benford’s Law. The results obtained by testing
the conformity to Benford’s Law are presented in Figure 8 for revenues and in Figure 9 for
income tax expenses.
Before IFRS implementation, from the analysis of the first digit test, it is noticed that
the item “Revenue” conforms to Benford’s Law at 5% level (Chi-Square 5.9008) due to the
clear rules regarding revenue recognition defined in the national accounting regulation
used by Romanian companies listed on BSE. Therefore, applying the first digit test to
analyse the compliance with Benford’s Law of the item “Revenue” recognized in income
statement after IFRS implementation, it is noticed the non-conformity to Benford’s Law at
5% level (Chi-Square 20.4081). The digit that generates significant differences is the digit 2
for which the Z-statistic is bigger than the critical value of 1.96 at 5% level. By applying the
first digit test in the case of income tax expenses, it is observed that at 5% level, the amounts
of income tax conform to Benford’s Law, both before IFRS implementation (Chi-Square
10.0816) and after IFRS implementation (Chi-Square 10.7521). Taking into consideration
the results obtained, we validate the Hypothesis 5 that the distributions of the first digits
of revenue reported in the income statement after IFRS implementation do not follow
Benford’s Law and invalidate the same hypothesis for the revenue recognised before IFRS
implementation. We could conclude that the excessive use of professional judgement due
to the complexity of IFRS leads to the non-compliance with Benford’s Law.
The results obtained by applying the MAD and KS test are similar to those obtained
by applying the Chi-square test, with the exception of the negative cash-flows by applying
MAD, the negative amount of cash-flows before IFRS implementation by applying KS,
and the revenue after IFRS implementation by applying KS. Taking into consideration the
superiority of the Chi-square test, in comparison with the MAD and KS for the present
study, the explanations of the results are based on the Chi-square test.
which the extensive professional judgement used in IFRS affects the application of Ben-
ford’s Law, we also applied the test for the income tax expenses. In the case of income tax
expenses, there are very strict rules for calculating the amount of income tax, and there-
fore, we expect that these amounts to conform to Benford’s Law. The results obtained by
Entropy 2021, 23, 557 testing the conformity to Benford’s Law are presented in Figure 8 for revenues and 17 of in
22
Figure 9 for income tax expenses.
Figure 8. Revenues. The figure shows, in accordance with Chi-square test, the conformity to Benford’s Law of Revenues
before IFRS
before IFRS implementation
implementation and
and the
the nonconformity
nonconformity to
to Benford’s
Benford’s Law
Law of
of Revenues
Revenues after
after IFRS
implementation. Score
Score based
based
on Chi-Square of 5.9008 (p-value 0.66) before IFRS implementation is lower than the critical value of 15.5073 at 5% level and
score based on Chi-Square of 20.4081 (p-value 0.01) after IFRS implementation is bigger than the critical value of 15.5073 at
5% level. Data set columns represents the observed percentages of the first digits and BL columns represents Benford’s Law
Kolmogorov-Smirnov is lower than the test value of 0.0519 at 5% level for 686 observations; after IFRS implementation, the
AMS of 0.0588, based on Kolmogorov-Smirnov, is lower than the test value of 0.0599 at 5% level for 516 observations; this
shows the conformity to Benford’s Law of Revenues in accordance with Kolmogorov-Smirnov test, both before and after
IFRS implementation. Score based on the mean absolute deviation (MAD) of 0.0079 before IFRS implementation is lower
than 0.015 and score based on the MAD of 0.0181 after IFRS implementation is bigger than 0.0150 (MAD bigger than 0.0150
shows the nonconformity to Benford’s Law in accordance with Nigrini [64]). Standard deviation of differences between data
set and Benford’s Law distributions is 0.74% before IFRS implementation and 1.37% after IFRS implementation. Z-Score is
516 observations; this shows the conformity to Benford’s Law of Revenues in accordance with Kolmogorov-Smirnov test,
both before and after IFRS implementation. Score based on the mean absolute deviation (MAD) of 0.0079 before IFRS
implementation is lower than 0.015 and score based on the MAD of 0.0181 after IFRS implementation is bigger than 0.0150
(MAD bigger than 0.0150 shows the nonconformity to Benford’s Law in accordance with Nigrini [64]). Standard deviation
of differences between data set and Benford’s Law distributions is 0.74% before IFRS implementation and 1.37% after IFRS
Entropy 2021, 23, 557
implementation. 18 of 22
Z-Score is calculated for each digit, similarly with the studies of Lacina et al. [28], Carslaw [40], Costa et
Figure 9.
Figure 9. Income
Income tax
tax expenses.
expenses. The
The figure shows the
figure shows the conformity
conformity to Benford’s Law
to Benford’s Law ofof Income
Income Tax
Tax Expenses
Expenses inin accordance
accordance
with Chi-square test, both before and after IFRS implementation. Score based on Chi-Square of 10.0816 (p-value 0.26)
with Chi-square test, both before and after IFRS implementation. Score based on Chi-Square of 10.0816 (p-value 0.26) before
before IFRS implementation and 10.7521 (p-value 0.22) after IFRS implementation is lower than the critical value of 15.5073
IFRS implementation and 10.7521 (p-value 0.22) after IFRS implementation is lower than the critical value of 15.5073 at 5%
at 5% level. Data set columns represents the observed percentages of the first digits and BL columns represents Benford’s
level. Data set columns
Law expected represents
percentages the digits.
of the first observed percentages
Before of the first digits
IFRS implementation, theand BL columns
absolute maximum represents Benford’s
score (AMS) Law
of 0.0291
expected
based onpercentages of the first digits.
Kolmogorov-Smirnov is lowerBefore
thanIFRS implementation,
the test value of 0.0559theatabsolute
5% level maximum score (AMS) ofafter
for 591 observations; 0.0291 based
IFRS imple-on
Kolmogorov-Smirnov
mentation, the AMS ofis 0.0404,
lower than
based theon
test value of 0.0559 at 5% level
Kolmogorov-Smirnov, for 591
is lower thanobservations;
the test valueafter IFRS implementation,
of 0.0681 at 5% level for 399 the
AMS of 0.0404,this
observations; based on Kolmogorov-Smirnov,
shows the conformity to Benford’s is lowerLawthan of
theIncome
test valueTaxofExpenses
0.0681 at 5% level for 399with
in accordance observations;
Kolmogorov- this
Smirnov
shows thetest, both before
conformity and afterLaw
to Benford’s IFRSof implementation.
Income Tax Expenses Scoreinbased on thewith
accordance mean absolute deviation (MAD)
Kolmogorov-Smirnov of before
test, both 0.0113
before
and afterIFRS implementation
IFRS implementation. andScore
0.0163 afteronIFRS
based implementation
the mean is lower (MAD)
absolute deviation than 0.0150 (MAD
of 0.0113 bigger
before than
IFRS 0.0150 shows
implementation
the nonconformity to Benford’s Law in accordance with Nigrini [64]). Standard deviation of differences
and 0.0163 after IFRS implementation is lower than 0.0150 (MAD bigger than 0.0150 shows the nonconformity to Benford’s between data set
Law in accordance with Nigrini [64]). Standard deviation of differences between data set and Benford’s Law distributions is
0.86% before IFRS implementation and 1.61% after IFRS implementation. Z-Score is calculated for each digit, similarly with
5. Conclusions
Reliability is one of the most important qualitative characteristics of financial infor-
mation. Over time, accounting has undergone a long process of transformation in order
to provide high quality standards. IFRS are used by listed companies all over the word
to prepare financial statements. The transition from national accounting regulations to
IFRS has been made in order to provide comparative information, which is more reliable
and more relevant. One of the main objectives of this study was to analyse if the transi-
tion to IFRS provided more reliable information than that obtained by applying national
accounting regulations. In order to reach this objective, Benford’s Law was used to test
Entropy 2021, 23, 557 19 of 22
the reliability of information, disclosed in financial statements by the companies listed on

BSE. The most significant items disclosed in the financial statements prepared both before
and after IFRS implementation were tested. The results of this study confirm the increase
of reliability of information disclosed in the balance sheets and the cash-flows statements
of listed companies after IFRS implementation. Regarding the increase of reliability of
information disclosed in the income statements of listed companies, the results of this study
confirm the increase in reliability after IFRS implementation only in the case of profitable
companies, but not for the companies that recorded losses. This study can be used as a
model for testing the reliability of information presented in financial statements on various
capital markets.
Another objective of this study was to identify the type of information, disclosed in
financial statements, that are suitable to conform with Benford’s Law. The results of this
study highlighted the fact that Benford’s Law should not be applied in testing the amounts
determined by estimates or by using the professional judgement of the accountant, as in
the case of depreciation or revenue recognition. When the rules applied to calculate the
amounts disclosed in financial statements are very clearly defined, those amounts tend to
conform to Benford’s Law. These results strengthen the belief that subjectivity introduced
in assessment, recognition and presentation of assets, liabilities, revenue and expenses
in financial statements leads to data that do not seem to conform to Benford’s Law. It is
known that Benford’s Law is often used as an analytical tool in the audit process to test the
potential fraudulent financial statements. The conclusions of this study are very important
because they reveal that non-compliance with Benford’s Law is not necessarily the result
of fraud, but the fact that only certain types of data are adapted to be tested according to
Benford’s Law.
As limitations of this research we can mention the small number of observations
used due to the small number of companies that are listed on BSE which is considered an
emerging market. It is recommended to conduct a similar research on developed capital
markets to test the extent to which the maturity of the capital market can influence the
reliability of accounting information. For the future researches in this field, we recommend
testing Benford’s Law taking into consideration different characteristics of listed companies
such as industry, size, performance indicators in order to identify whether or not they can
influence Benford’s Law compliance.
Author Contributions: The authors of this article have equally contributed to every stage in its
development. All authors have read and agreed to the published version of the manuscript.
Funding: This research was funded by project PN-III-P4-ID-PCCF-2016-0084 “Înţelegerea si mode-
larea structurilor spatio-temporale ale inegalităţilor şi polarizării în relaţie cu caracteristicile psiho-
logice”.
Data Availability Statement: All datasets are available at http://eikon.thomsonreuters.com/index.
html, accessed on 29 April 2021.
Acknowledgments: The authors would sincerely like to thank the anonymous peer reviewers
for their helpful comments and suggestions. Thanks for Ionela Guşatu (Department of Modern
Languages, “Carol Davila” University of Medicine and Pharmacy, Bucharest, Romania) and Elena-
Diana Jianu (Student at the National College “Şcoala Centrală” of Bucharest, Romania), who checked
the English for the later version of our manuscript.
Conflicts of Interest: The authors declare no conflict of interest. The funders had no role in the design
of the study; in the collection, analyses, or interpretation of data; in the writing of the manuscript, or
in the decision to publish the results.
Entropy 2021, 23, 557 20 of 22
Abbreviations
The following abbreviations are used in this manuscript:
BL Benford’s Law
BSE Bucharest Stock Exchange
IFRS International Financial Reporting Standards
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Department of Accounting and Audit, The Bucharest University of Economic Studies,

Entropy 2021, 23, 557. https://doi.org/10.3390/e23050557 https://www.mdpi.com/journal/entropy

to the most important financial statements established by listed companies, respectively

Table 1. Benford’s Law: Expected Digits Frequencies.

3.2. Research Hypotheses

We expect this hypothesis to be validated in the case of IFRS implementation and

3.3. Data Collection

Figure 2.2. Accounts

Entropy 2021, 23, 557 11 of 22

the reliability of information, disclosed in financial statements by the companies listed on

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