Benford's law, small business financial reporting, and survival

Patel, Pankaj C. and Tsionas, Mike G. and Guedes, Maria João (2022) Benford's law, small business financial reporting, and survival. Managerial and Decision Economics, 43 (8). pp. 3301-3315. ISSN 0143-6570

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Abstract

Benford's law states that in collections of numbers, the leading digit is likely to be small. Drawing on this law, which is a widely used tool in forensic accounting, we ask whether small and medium-sized enterprises (SMEs) that violate Benford's law on the reporting of key accounting items are more likely to fail. Using a sample of 220,583 Portuguese SMEs (2010–2018), those companies violating Benford's law in reporting cash had the highest odds of failure, followed by net income, current liabilities, assets, and sales. The findings indicate that myopic strategic manipulation in financial reporting may lead to SME failure.