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I was recently reading an article about how financial accounting has increasingly deviated from the ratios expected by Benford's Law. (Benford's Law and Decreasing Reliability).

The author discusses the S&L crisis, but that's not enough to say that Benford's Law is a good predictor of performance. How reliable of a predictor is Benford's Law for anticipating crises or even for company failure on a case by case basis? If you could cite specific examples from history, that would be great.

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    $\begingroup$ Completely random but - the applications of Benford's Law and the law itself blow my mind. $\endgroup$ – Zermelo Nov 14 '11 at 22:08
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A recent example is Greece. Greece's public accounts deviated significantly from the distribution of values indicated by Benford's Law just before joining the Euro.

It has been suggested that Greece modified their numbers in order to remain compliant with the Maastrict Treaty.

You can get the full article + statistics for all Euro members here. It shouldn't even be behind a pay wall.

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    $\begingroup$ An addition: An Econerd post discussed the epidemic of Bradford Law violations just before the recent market crash. econerdfood.blogspot.com/2011/10/… $\endgroup$ – CarrKnight Oct 13 '11 at 20:11
  • $\begingroup$ I appreciated the econerdfood post. What a good econ blog (written by an assistant professor, so I shouldn't be that surprised). Make sure to read her follow-up article, econerdfood.blogspot.com/2011/10/… posted after you wrote this. Her findings were less conclusive in some ways, and more in other ways in the follow-up. $\endgroup$ – Ellie Kesselman Nov 25 '11 at 4:12
  • $\begingroup$ Oh, one more thing. I wasn't able to access that second URL you posted, which I've been eager to read for quite awhile (Handelsblatt journalist Olaf Storbeck wrote about it too). Any suggestions about that? (Your first URL was cross-published in the FT by the way, and it was quite a fine article). $\endgroup$ – Ellie Kesselman Nov 25 '11 at 4:15
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Keep in mind that Benford's law is not a universal or natural law. A violation of Benford's law is neither a necessary nor a sufficient condition to prove a flaw or a quality issue in the data. At the best, it can give you a hint, but it should not be trusted blindly. Moreover, note that for some types of data the law will not work at all, such as e.g Likert scale variables or binary variables.

It is also problematic to apply Benford's law to macroeconomic data. Structural breaks which can typically be found in economic data series can result in a rejection of Benford's law. There is an interesting article by two IMF statisticians on that topic: Benford’s Law and Macroeconomic Data Quality.

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  • $\begingroup$ rescued from a deleted answer $\endgroup$ – EnergyNumbers Dec 24 '11 at 10:28

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