Evaluating Conformity of Municipality Financial Data to Benford’s Law: An Exploratory Study

Abstract

Benford’s Law provides an expected distribution of leading digits in a set of occurring numbers. The Law has been used to examine the distribution in many different types of data to identify irregularities or evidence of fraud. This paper provides exploratory evidence about the application of Benford’s Law in the government sector to analyze reported financial data from municipalities. The results suggest there is a significant nonconformity in reported financial information related to business type activities between those municipalities with unrestricted net position deficit balances (i.e. troubled municipalities) and those municipalities with a positive unrestricted net position balance (non-troubled municipalities).