Purpose: This paper aims to examine how proportional appropriation systems affect the quality of financial reporting in entities controlled by local governments. Design/methodology/approach: The authors examine this issue using the setting of Italian municipally owned entities (MOEs) following the implementation of a new accounting regulation that limits the spending power of the participating municipality when the owned entity reports losses. The authors apply Benford's law on net income figures using the Chi-square and Z-tests on the adjusted version of the Mean Absolute Deviation (MAD) criterion to spot any sign of low data quality. The sample, which consists of 2,120 MOEs, covers the years 2010–2019 and is evenly divided into the periods pre- and post-policy introduction. Findings: Widespread data anomalies were detected following the introduction of the new regulation for MOEs controlled by local governments. Evidence is stronger for entities owned entirely by municipalitie
Article: The amazing watermelon, plus horses - Occasionally, it s good to look around at life and discover some amazing things, about watermelon, numbers and horses, for instance. It s called being present in my life.
Benford's Law has been widely used in the literature to assess data quality and reliability. This paper examines the impact of local elections on financial reporting quality in entities controlled by local governments using a data science approach. By applying Benford's Law on financial statements published by Italian municipally owned entities operating in utility industries, we find diffuse data anomalies around election seasons. This does not automatically means that illegal manipulation or fraud are widespread in those periods, but it implies that (i) auditors need to pay particular attention to the quality of accounting data in those crucial periods and specific environments; and that (ii) voters and media have to be critical in assuming municipally owned entities’ indicators of financial performance as proxies of the administrative efficiency of incumbent politicians.
How do accountants (like me) quickly detect the presence of fudged data in financial reports? We use a little known technic called the Newcomb-Benford’s law to efficiently and quickly analyze a set of numbers. FYI: https://en.wikipedia.org/wiki/Benford%27s law
How does this law work? We take the