Empirical evidence of financial statement manipulation during economic recessions

This paper uses Benford’s Law, a mathematical law that predicts the frequency of naturally occurring numbers, to investigate the occurrence of the intentional manipulation of reported financial statement numbers during recessionary times. The analysis shows that reported financial statement data generally conforms to Benford’s Law. However, in periods surrounding recessions occurring since 1950, reported financial statement numbers fail to conform, indicating an increased level of manipulation. It is important to note that the data used in this study has been restated to correct the effects of financial statement manipulations that have been caught and corrected. Therefore, the results of this study indicate that, during recessionary times, there is a certain level of financial statement manipulation that goes undetected—most likely because the manipulations are corrected when the economy improves and are not exposed by events such as bankruptcy. It is also important to note that the tests in this study cannot distinguish between manipulations that may be within the parameters of generally accepted accounting procedures and those that may cross the line into fraud.