A pragmatic study of Benford Law in detecting earnings management; based on Public Limited companies of the UK

This paper presents the estimation of the earnings management and analyse the manipulations by implementing Benford’s Law. The estimation of the earnings management and detecting the magnitudes of errors in earnings management has been rarely studied in FTSE350 companies context, therefore, This paper estimates the values of earnings management by using performance matched discretionary accruals and analyse the performance of earnings manipulation by adopting Benford’s Law. The data of 304 companies from 2019 – 2024 have been collected since rest of the FTSE350 companies’ data were not available. The authors of this paper use Benford’s law based on the first digit, second digit and first two digits data as a benchmark and analyse the performance of earnings management. It has been identified that the naturally occurred value of earnings management have very high differences from the data articulated by Benford law. This indicates that there are significant manipulations in the value earnings management. While considering the findings based on frequency of first digits of earnings management, this research annotates that the FTSE350 companies are actively involved in aggressive earnings management using the techniques of income smoothing, Big Bath and Cookie Jar. Conversely, while considering the analysis of frequencies of first two digits of earning management values, this research identifies that FTSE350 companies are actively involved in aggressive earnings management but regarding the techniques used, it does not reflect such consistency that the first digit reflects. The authors added significant contribution to the area of accounting and finance research. The issues on earnings management need attentions and need to be further discussed and analysed.