Applying Benford’s Law to detect accounting data manipulation in the pre-and post-financial engineering periods

Etienne Harb, Nohade Nasrallah, Rim El Khoury, Khaled Hussainey

Research output: Contribution to journalArticlepeer-review

176 Downloads (Pure)

Abstract

Purpose: Lebanon has faced one of the most severe financial and economic crises since the end of 2019. The practices of the Lebanese banks are blamed for dangerously exposing economic agents and precipitating the current financial collapse. This paper examines the patterns of manipulation of the 10 biggest banks before and after implementing the financial engineering mechanism.

Design/methodology/approach: We apply Benford Law for the first and second positions of the reports of condition and income and four out of the six aspects of the CAMELS rating system (Capital Adequacy, Assets Quality, Management expertise, Earnings Strength, Liquidity, and Sensitivity to the market) by excluding Management and Sensitivity. The deviations from BL frequencies are tested using Z-statistic and Chi-square tests.

Findings: Banks seem to have manipulated their Capital Adequacy, Liquidity, and Assets Quality in the pre-financial engineering and considerably in the post-financial engineering periods. Fraudulent manipulations in the banking sector can distort depositors, shareholders, and regulating authorities.

Originality: The study is the first to examine the patterns of fraudulent manipulation in the Lebanese banking industry using Benford Law (BL).
Research implications: This study has many implications for governmental authorities, commercial banks, depositors, businesses, accounting and auditing firms, and policymakers. The Lebanese government needs to implement corrective fiscal and monetary policies and apply amendments to the bank secrecy and capital control law. The central bank should revamp its organizational structure, improve its disclosure practices and significantly reduce its ties to the government and the political elite.
Original languageEnglish
JournalJournal of Applied Accounting Research
Early online date9 Jan 2023
DOIs
Publication statusEarly online - 9 Jan 2023

Keywords

  • Benford Law
  • frauds
  • financial engineering
  • reports of condition and income
  • CAMELS
  • Lebanon

Cite this