Local elections and the quality of financial statements in municipally owned entities: A Benford analysis

Abstract

Benford’s Law has been widely used in the literature to assess data quality and reliability. This paper examines the impact of local elections on financial reporting quality in entities controlled by local governments using a data science approach. By applying Benford’s Law on financial statements published by Italian municipally owned entities operating in utility industries, we find diffuse data anomalies around election seasons. This does not automatically means that illegal manipulation or fraud are widespread in those periods, but it implies that (i) auditors need to pay particular attention to the quality of accounting data in those crucial periods and specific environments; and that (ii) voters and media have to be critical in assuming municipally owned entities’ indicators of financial performance as proxies of the administrative efficiency of incumbent politicians.