middle easten
Forensic accounting research

Forensic accounting research

20-07-2016 | From the field

Macquarie applies Benford’s law to identify firms which may be manipulating their accounting data, or perhaps even engaging in outright fraud. According to this law, there is a natural frequency of 1 to 9 occurring as the first digit in a number, with the chance of 1 for instance being around 30%, and the chance of 9 less than 5%.

  • David Blitz
    PhD, Executive Director, Head of Quant Selection Research

If the figures in the financial statements of a company show a large deviation from Benford’s law, this could be a reason for suspicion. They find a Sharpe ratio of about 0.5 for a sector neutral top-minus-bottom quintile strategy based on this idea. The correlation with traditional quantitative factors is found to be low, which suggests it could be a nice diversifier in multi-factor models.

Our main concern is whether it is really strong enough to improve upon a traditional multi-factor model. The robustness across different markets would also need to be investigated further.

* Macquarie, “Japan Dynamics: Quant Strategy – Red Flag Reporting”, 16 July 2014

Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates
From the field
From the field

Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others.

Read all articles
Subjects related to this article are:


Robeco Institutional Asset Management B.V. (Dubai office) is regulated by the Dubai Financial Services Authority (“DFSA”) and only deals with Professional Clients and does not deal with Retail Clients as defined by the DFSA.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports, which can be all be obtained free of charge at this website and at the Robeco offices in each country where Robeco has a presence.

Please confirm that you are a professional investor and/or institutional investor and that you have read, understood and accept the terms of use for this website.

I Disagree