Are Sarbanes-Oxley and Dodd-Frank Working? Non-Parametric Exploration of Benford’s Law and Financial Statements 1970-2013

• In Event: SOX, Financing Terrorist Organizations, and Fraud Protection

Abstract

This trifold investigation explores numeric substance and statistical methodology in relation to Benford’s Law and public company financial statement numbers. First, it analyzes over 40 years of public company financial statement data utilizing non-parametric, generalized additive modelling and provides evidence that the Benford’s Law conformity of public company financial statement numbers has not noticeably increased since the implementation of the Sarbanes Oxley Act (2003) or the Dodd Frank Act (2010). This finding suggests possible failure of these regulatory initiatives to meet some of their intended objectives. Second, it presents evidence that Mean Absolute Deviation (MAD), a leading metric for testing conformity with Benford’s Law, is negatively correlated with sample size, raising questions regarding the optimal use of the MAD metric as a financial reporting manipulation screening tool. Third, it proposes a MAD transformation, styled Excess MAD, as a more accurate and stable measure of conformity to Benford’s Law.

Authors

• Bradley J. Barney, Kennesaw State University

• Kurt S. Schulzke, Kennesaw State University