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

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  • Etienne Harb
    ESSCA School of Management, Paris
  • Nohade Nasrallah
    University of Strasbourg
  • Rim El Khoury
    Lebanese American University
  • Khaled Hussainey
    University of Portsmouth
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
The authors 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.

Research limitations/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.

Practical implications
The study findings suggest that the central bank should revamp its organizational structure, improve its disclosure practices and significantly reduce its ties to the government and the political elite.

Originality/value
The study is the first to examine the patterns of fraudulent manipulation in the Lebanese banking industry using Benford Law (BL).
Iaith wreiddiolSaesneg
CyfnodolynJournal of Applied Accounting Research
Dyddiad ar-lein cynnar9 Ion 2023
Dynodwyr Gwrthrych Digidol (DOIs)
StatwsCyhoeddwyd - 14 Gorff 2023
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