Applying Benford’s Law to South African SOEs: Inferences on SOE audit quality and audit quality-linked financial performance

Abstract

Mismanagement of state-owned enterprises (SOEs) have far-reaching implications for countries, including increased domestic borrowing, decreased private investment, decreased gross domestic product, and increased unemployment. Balancing these implications on the existence of SOEs underscores their relevance and importance in functioning economies. Due to increased attention to mismanagement of South African Schedule 2 SOEs, they formed the basis for this study, against the backdrop of potential accounting misrepresentations present in financial statements. The purpose of this study was to determine whether South African Schedule 2 SOE financial statements conformed to Benford’s Law, and whether detected financial mismanagement correlated to decreased financial performance. An analysis of financial statement panel data from 1990 to 2020 was studied for conformity to Benford’s Law and financial performance. The results showed that South African Schedule 2 SOEs did not conform to Benford’s Law and no statistically significant relationship existed between conformity to Benford’s Law and financial performance. The study answered the research questions of whether South African Schedule 2 SOEs conformed to Benford’s Law and if a relationship between conformity to Benford’s Law correlated to financial performance. Further research is required to overcome the limitations of unreliable South African Schedule 2 SOE ROE data, missing data and heteroscedasticity, to develop more definitive results.