Does economic reform program affect financial reporting quality? A Benford’s law perspective and evidence from Egypt

Purpose This study aims to use Benford’s Law (BL) to investigate the financial reporting quality (FRQ) of nonfinancial firms in the pre- and post-Egyptian Economic Reform Program (EERP) periods. Design/methodology/approach Using first- and second-digit analyses of BL, the authors analyze all financial reporting figures (balance sheet, income statement and cash flow statement) of nonfinancial companies listed on the Egyptian Stock Exchange (EGX) from 2011 to 2019. The financial statement divergence score (FSD Score) and z-statistic are used to assess the conformity to BL and the statistical significance of deviations for each digit. Findings The findings document the conformity to BL for all financial statements and each statement level in both the pre- and post-EERP periods, providing evidence of high-quality and reliable financial reporting practices during these periods. Notably, the significant reduction in FSD scores in the post-EERP period underscores the positive impact of EERP on FRQ. Originality/value To the best of the authors’ knowledge, this is the first study to use BL to examine the influence of economic reforms on FRQ in the MENA region, especially the EERP. The authors provide evidence supporting the effectiveness of BL as an effective alternative measure for earnings management in a developing economy. This study demonstrates the significance of BL for auditors, investors, analysts and regulatory bodies, providing a cost-effective, scalable and repeatable approach to detecting potential manipulation in financial statements.