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The "Book-Cooking" Index Soars To All Time Highs

Tyler Durden's picture




 

Everyone has heard of the Big Mac Index, the Misery Index, even the Shoe Thrower Index. But the Book Cooking Index? This latest addition to the compendium of oddly named yet extremely fascinating "indices" is based around the statistical irregularity known as Benford's law, according to which within sets of numbers that span orders of magnitude, the distribution of first digits is strikingly regular: numbers beginning in 1 occur about 30% of the time, those beginning in 2 about 18% of the time, falling to roughly 5% of the time for the number 9. Specifically, as noted by the keenly observant Jialan Wang of Washington University in St. Louis, "there are more numbers in the universe that begin with the digit 1 than 2, or 3, or 4, or 5, or 6, or 7, or 8, or 9.  And more numbers that begin with 2 than 3, or 4, and so on.  This relationship holds for the lengths of rivers, the populations of cities, molecular weights of chemicals, and any number of other categories." The most curious application of this law resides in the field of corporate fraud, "because deviations from the law can indicate that a company's books have been manipulated." Here is where things get interesting for fraudulent corporate America: the inquisitive Wang "downloaded quarterly accounting data for all firms in Compustat, the most widely-used dataset in corporate finance that contains data on over 20,000 firms from SEC filings" and "used a standard set of 43 variables that comprise the basic components of corporate balance sheets and income statements." Her results were, in a word, startling.

As she observes, "here are the distribution of first digits vs. Benford's law's prediction for total assets and total revenues."

In other words, corporate numbers behaving precisely as predicted by a purely statistical law!

But here is where it gets truly strange. In her words, "Deviations from Benford's law have increased substantially over time, such that today the empirical distribution of each digit is about 3 percentage points off from what Benford's law would predict.  The deviation increased sharply between 1982-1986 before leveling off, then zoomed up again from 1998 to 2002.  Notably, the deviation from Benford dropped off very slightly in 2003-2004 after the enactment of Sarbanes-Oxley accounting reform act in 2002, but this was very tiny and the deviation resumed its increase up to an all-time peak in 2009."

Said otherwise, the chronological change in this parameter allows some starting conclusions. As the Economist notes, "This regularity has been used to identify cases of fraud in public documents. Someone cooking books is likely to choose numbers somewhat randomly, generating a distribution of digits far more uniform than Benford's law would predict. Any divergence that shows up sets off alarm bells in those looking for funny business."

Visually presented, it looks as follows:

Yes, book-cooking, in the purest statistical "correlation does not imply causation" has hit an all time high! Granted we doubt any regulator, least of all the corrupt criminal SEC, whose own Benford's law chart would look like a lie detector test hooked up to Jamie Dimon during a conference all, would admit this evidence in a court of law, but deluded investors who believe that corporation are being always truthful with data and reporting should probably be aware that that is certainly not the case. Per the Economist: "As Ms Wang notes, this isn't decisive proof of misbehaviour. It is suggestive, however, of the possibility that systematic number-fudging has been on the upswing in recent decades. Moreover, it's an excellent use of clever statistical analysis to provide a new perspective on an economic question."

Considering the surge in white collar criminality over the past 3 decades, especially among financial firms, and the fact that this "index" is now at all time highs, we would hardly be as politically correct about the issue as the Economist.

But that's us.

As for next steps, "What types of firms, and what kind of executives drive the greatest deviations from Benford's law?  Does this measure do well in predicting known instances of fraud?  How much of these deviations are driven by government deregulation, changes in accounting standards, and traditional measures of corporate governance?" All these are fascinating questions that Wang will answer in the immediate future and we will advise readers when she does.

For now, the take home message is this: if it appears that "they" are lying to you, "they" probably are. Just run a numerical regression analysis to prove it.

 

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Thu, 10/13/2011 - 23:15 | 1772203 Josh Randall
Josh Randall's picture

Sauteed books B!tchez!

Thu, 10/13/2011 - 23:27 | 1772237 Oracle of Kypseli
Oracle of Kypseli's picture

In other news, gold is hovering around $1666/oz. Is someone telling us we control everything? don't dare buy? the devil is in control?

Your thoughts!

Thu, 10/13/2011 - 23:30 | 1772245 Arkadaba
Arkadaba's picture

He he - I have no idea which way metals and certain currencies are going. There are just too many variables in the game right now. 

Thu, 10/13/2011 - 23:54 | 1772308 tekhneek
tekhneek's picture

I see two immmediate variables:

Paper and Money.

I'll take Money for $1 trillion Trebek.

Fri, 10/14/2011 - 00:16 | 1772365 Unprepared
Unprepared's picture

The researcher is wrong.

This is nothing other than 'only $-.99' pricing strategy applied to corporate paper sales.

Happy Chrismess.

Fri, 10/14/2011 - 00:32 | 1772405 Ahmeexnal
Ahmeexnal's picture

Time to analyze the blowjob index?

Fri, 10/14/2011 - 02:50 | 1772603 Cynical Sidney
Cynical Sidney's picture

wang heh, i just can't get behind wang's fraud index; "limitations of Benford's law: it can only be applied to data that are distributed across multiple orders of magnitude." there's your problem right there, for example hardly anyone or anything can go beyond the 100 billion dollar threshold, a fact which diminishes the prevalence of 100,000,000,000. desirdavenir cite ur sources plz

i have my doubts at this moment; but maybe it is true, maybe it's telling us there are more off-balance shells than ever before; i'd have to check with a biostatistician.

Fri, 10/14/2011 - 04:27 | 1772654 Storch
Storch's picture

There arent more numbers that start w 1, they just come earlier when counting something so you are more likely to stop on them when counting. There are more MEASURMENTS in yhis universe that start w 1. That is a scary important distinction that wang needs to be semantically correct about. I can assure you i can prove there are just as many numbers that start w 9 if you never stop counting.

Fri, 10/14/2011 - 06:58 | 1772747 AbelCatalyst
AbelCatalyst's picture

Are you saying this may be more of an inflation indicator? Does it indicate that the numbers in the sample set are increasing over time? That would seem to make sense.... If it actually tracked fraud I think it would have more of a hockey stick look to it - begin moderately then shoot to the moon the past 10 years...

Fri, 10/14/2011 - 09:20 | 1773089 Raymond K Hessel
Raymond K Hessel's picture

This is a statistical law, not real number theory, so you are mixing apples and oranges.

 

I have never been introduced to Benford's law before this so I would do research into it.  From what I've seen thus far on Wikipedia, it seems plausible.  As with any encylcopedia, that would be a jumping off point for research, not the final read.

 

If it works, I would guess this is how the SEC uses these anomalies in trading data to find insider trading, porn-surfing permitting.

Sat, 05/19/2012 - 11:22 | 2337017 mediaprizm
mediaprizm's picture

In a perfect world all of us would could spend hours meandering around the local farmers' market, hand-selecting ingredients for a gorgeous meal. Then we'd leisurely make our way back to our well appointed kitchens to prepare said meal, giving no thought to time constraints.Tecfrigo - Mercatus

Fri, 10/14/2011 - 02:22 | 1772577 desirdavenir
desirdavenir's picture

the Benford laws also applies well to prices in a supermarket. This is odd, but true. Also, funnily, it applies also when you convert the prices in another money (e.g., Franc to Euro)... One can find a mathematical justification for it (using a natural measure on numbers which is not a probability distribution), but the fact that this justification is correct is odd...

Fri, 10/14/2011 - 06:22 | 1772703 Taint Boil
Taint Boil's picture

 

 

Well ‘Smear my ears with jam and tie me to an ant hill’ now I have heard everything. Very, very interesting and probably spot on.

Fri, 10/14/2011 - 08:58 | 1772985 11b40
11b40's picture

'xactly...it's just 19.99 turned updide down.  Inflation drove that 9.99 pizza all the way to 19.99

Fri, 10/14/2011 - 00:00 | 1772276 Hearst
Hearst's picture

Couple years ago Gold hovered at $666 for a few.  I wouldn't worry because now it's a larger and more appreciated number.  As for the devil?  Read Matthew 4 starting at verse 8 http://www.biblegateway.com/passage/?search=Matthew+4&version=KJV to understand that the devil is the house and all the world gambles at his tables.  All it took was for the most righteous Man ever to put the devil in his place.  

Fri, 10/14/2011 - 00:14 | 1772360 dark pools of soros
dark pools of soros's picture

Tebow?

Fri, 10/14/2011 - 00:33 | 1772408 rosiescenario
rosiescenario's picture

.......Perry?

Fri, 10/14/2011 - 00:20 | 1772375 Strike Back
Fri, 10/14/2011 - 00:29 | 1772396 Hearst
Hearst's picture

Thats awesome!

Fri, 10/14/2011 - 00:31 | 1772401 Strike Back
Strike Back's picture

Yeah, uh, I got it off of reddit.

Fri, 10/14/2011 - 01:01 | 1772485 IQ 101
IQ 101's picture

"If you do not have a sword,sell your robes and get one"

Where did I read that?

Fri, 10/14/2011 - 08:25 | 1772900 i-dog
i-dog's picture

In a book?

Fri, 10/14/2011 - 03:05 | 1772613 The Knights Who...
The Knights Who Say Ni's picture

Yawn.

 

Fri, 10/14/2011 - 03:05 | 1772614 The Knights Who...
The Knights Who Say Ni's picture

Yawn.

 

Fri, 10/14/2011 - 03:11 | 1772617 Hephasteus
Hephasteus's picture

So you're saying your reading an instruction manual that's 2000 years old and never worked?

God is evil. Not regular evil. Lawful evil. He lives as lawful evil but dies as chaotic stupid.

http://tvtropes.org/pmwiki/pmwiki.php/Main/ChaoticStupid

Fri, 10/14/2011 - 05:58 | 1772690 Mentaliusanything
Mentaliusanything's picture

Hephasteus...

Hope the moon stays where its been for a millennia

Hope the tide rises to meet you exactly as planned

Hope the Sun rises just where it has, at the time it has for......  ever

Hope season show you who is in control

Hope the stars that have stood since man could looked up from the ground continue to shine and show us our insignificance.

Hope that you understand that the existence of something very stationary and very powerful is evident in nature.

Be wise and Fear what a man and his mind cannot contain. 

Spoken by someone who was like you... and much like Paul of Tarsus

Apologies to the others but it deserved a recant based of visual undeniable facts.

Now back to Guns Gold Grub and a little Banker Hatin 

 

Thu, 10/13/2011 - 23:49 | 1772298 Josh Randall
Josh Randall's picture

I wouldn't doubt it - all these Power Brokers are into numerology, symbolism, and intimidation. The biggest gag of all is a Presidential candidate named Cain (as opposed to Abel) with a 666...errr..999 plan whom was a Director of the Fed (the most wicked entity there is) --- if people can't wake the hell up and see that these aren't coincidences, then they derseve what they get.

   

Fri, 10/14/2011 - 00:27 | 1772394 scatterbrains
scatterbrains's picture

11/11/11 bitches with a full moon passing on the evening of the 10th.

Fri, 10/14/2011 - 00:38 | 1772426 Lord Blankcheck
Lord Blankcheck's picture

Gold is the Anti-Dollar not the Anti-Christ

Fri, 10/14/2011 - 07:20 | 1772782 jus_lite_reading
jus_lite_reading's picture

The amount of cooking going on in the home building industry (especially with Troll Bros) would make Rachel Ray jealous...

 

Game over!

 

And Happy Kwanaza BITCHES!!! I am BAAAACK!!

Thu, 10/13/2011 - 23:16 | 1772204 Finance Addict
Finance Addict's picture

Yes, excellent work by Jialang. We noticed it here earlier today on Finance Addict, as well: http://bit.ly/r6VbcB

Fri, 10/14/2011 - 00:14 | 1772361 decon
decon's picture

I'd be willing to bet that some categories of financial data would not conform to Benfords distribution.  An example would be an analysis of item pricing data.  The most common numeral used in pricing is "9".

Fri, 10/14/2011 - 00:54 | 1772472 CrazyCooter
CrazyCooter's picture

I think you are correct (not that I have any omnipotence about such things). On that note, I would observe it doesn't explain the multi-decade trend.

Regards,

Cooter

 

Fri, 10/14/2011 - 01:29 | 1772535 SelfGov
SelfGov's picture

I bet it would look fudged beyond belief which prices almost always are.

Fri, 10/14/2011 - 01:48 | 1772547 zhandax
zhandax's picture

As I understand it, Benford's distribution predicts how often a number begins with a particular digit.  Although 9 seems most common in pricing, it is also most commonly used in the last digits.

Fri, 10/14/2011 - 02:23 | 1772579 desirdavenir
desirdavenir's picture

Benford's law is on the first digit

Thu, 10/13/2011 - 23:25 | 1772218 CompassionateFascist
CompassionateFascist's picture

The smallish (7 employees, 30 indep contractors) Co. I work with is "solvent"....provided you don't count the $100,000 maxed-out corporate credit card. As to where that money went, don't ask. There hasn't been an audit in many years...just like the Fed/Fort Knox.

Thu, 10/13/2011 - 23:36 | 1772262 alien-IQ
alien-IQ's picture

sounds like a pink sheet about to go on a 50,000% run.

Thu, 10/13/2011 - 23:21 | 1772219 arm50
arm50's picture

Would love to see the distribution of our Govt supplied numbers

Fri, 10/14/2011 - 00:49 | 1772453 knukles
knukles's picture

"Trust US"

Fri, 10/14/2011 - 00:56 | 1772476 CrazyCooter
CrazyCooter's picture

Just wait til they are all "zero" ... that will do a number on that chart!

Regards,

Cooter

Thu, 10/13/2011 - 23:22 | 1772222 alien-IQ
alien-IQ's picture

I'm gonna need a bigger calculator....

Thu, 10/13/2011 - 23:26 | 1772225 Caggge
Caggge's picture

Original movie: Wall Street reams main street with their wangs.

Sequel : The Wang strikes back

Thu, 10/13/2011 - 23:23 | 1772226 maxw3st
maxw3st's picture

Nice to see there is statistical evidence backing something I strongly suspected when reviewing corporate financials. I spent several years as a broker and did a lot of 10Q reading. It ultimately led to my exiting the business as it became obvious it was a rigged game. Rigged against the small investors I was supposed to be serving that is.

Thu, 10/13/2011 - 23:28 | 1772241 Belarus
Belarus's picture

Broker's reading 10Q's? I thought brokers just sold the the lipstick on the pigs?

Thu, 10/13/2011 - 23:24 | 1772231 maxw3st
maxw3st's picture

Any body for checking GOP campaign financing?

Thu, 10/13/2011 - 23:26 | 1772238 CompassionateFascist
CompassionateFascist's picture

Prolly a lot like Democrat campaign finance. Check out Solyndra, you stupid f^^^k.

Thu, 10/13/2011 - 23:29 | 1772242 Caggge
Caggge's picture

For that matter, when Hillary ran up her campaign bills, I think she was bailed out by the DNC. Living within a persons means should start at the top.

Thu, 10/13/2011 - 23:26 | 1772236 Belarus
Belarus's picture

I wonder how badly the Fed's balance sheet has been book cooked? I'm guessing it has been fairly well fried since a couple doofus' we all know well took the chairman's seat. 

Thu, 10/13/2011 - 23:31 | 1772248 LongSoupLine
LongSoupLine's picture

That chart would be an inverted vertical climb.

Thu, 10/13/2011 - 23:42 | 1772278 gmcniff
gmcniff's picture

priceless.  simply priceless.

Fri, 10/14/2011 - 00:17 | 1772373 dark pools of soros
dark pools of soros's picture

actually the fed can just keep adding zeros and leave the front at 1

Fri, 10/14/2011 - 00:51 | 1772464 knukles
knukles's picture

We don't need no stinkin' audit.
Trust us.
We're important.
We'd never fuck with you.

 

Fri, 10/14/2011 - 05:41 | 1772684 The Knights Who...
The Knights Who Say Ni's picture

The Fed never fucks up - that's why it's on top of everyone.

Thu, 10/13/2011 - 23:30 | 1772243 LongSoupLine
LongSoupLine's picture

ZH whipping out the cutting edge exposure shiznit yet again.  nice.

Thu, 10/13/2011 - 23:30 | 1772246 slewie the pi-rat
slewie the pi-rat's picture

the creative accounting & shell game olympics have never been played at this level, for quite these stakes, before...

<drum roll>

 

Thu, 10/13/2011 - 23:38 | 1772268 Hephasteus
Hephasteus's picture

http://en.wikipedia.org/wiki/Accounting_scandals

It's been slowly growing since 1980.

Thu, 10/13/2011 - 23:42 | 1772281 slewie the pi-rat
slewie the pi-rat's picture

i will take issue w/ the part of the article that says that a person cooking the books will tend to use random numbers

that's why they get caught;  they don't know how to cook the books right!

Thu, 10/13/2011 - 23:32 | 1772251 Cliff Claven Cheers
Cliff Claven Cheers's picture

A Kenyan, a Communist and a Muslim walk into a bar.  The bartender says "What can I get you Mr. President?"

Fri, 10/14/2011 - 00:02 | 1772328 Caggge
Caggge's picture

Before his 2001 inauguration, George Bush was invited to a get acquainted tour of the White House.

After drinking several glasses of iced tea, he asked Bill Clinton if he could use his personal bathroom.

When he entered Clinton 's personal bathroom, he was astonished to see that President Clinton had a solid gold urinal.

That afternoon, George told his wife, Laura, about the urinal. 'Just think,' he said, 'when I am president, I could have a gold urinal too.
But I wouldn't do something that self-indulgent!'

Later when Laura had lunch with Hillary at her tour of the White House, she told Hillary how impressed George had been at his discovery of the fact that, in the President's private bathroom, the President had a gold urinal.

That evening, when Bill and Hillary were getting ready for bed, Hillary smiled, and said to Bill . . . "I found out who pissed in your Saxophone."

Fri, 10/14/2011 - 00:13 | 1772355 Cliff Claven Cheers
Cliff Claven Cheers's picture

Do you know what the difference is between a Ritz and a lesbian?

One is a snack cracker and the other is a crack snacker.

Fri, 10/14/2011 - 00:03 | 1772330 Restcase
Restcase's picture

An accountant, an economist, and a stastician walk into a bar...

I need help finishing that one.

Fri, 10/14/2011 - 00:55 | 1772370 tickhound
tickhound's picture

Sonny says, "Now you's can't leave"

http://www.youtube.com/watch?v=9Bv24EcQxWA

Fri, 10/14/2011 - 00:25 | 1772390 dark pools of soros
dark pools of soros's picture

.. the Statistician drinks until he runs out of cash

.. the Accountant drinks until he runs out of credit

.. the Economist drinks until he runs out of cocks to suck

Fri, 10/14/2011 - 00:29 | 1772397 Cliff Claven Cheers
Cliff Claven Cheers's picture


Beer is better than Obama because imported beer doesn’t pretend to be domestic. 


 

Fri, 10/14/2011 - 00:40 | 1772430 Caggge
Caggge's picture

Asked by his teacher to compare three presidents Johnny thought for a moment and said: "Well, George Washington couldn't tell a lie.  Richard Nixon couldn't tell the truth.  And George W. Bush can't tell the difference."

Fri, 10/14/2011 - 00:43 | 1772436 Caggge
Caggge's picture

Bob Packwood, Dick Cheney and George Dubya Bush go into a bar.  Packwood orders first. "I'll have a B and C." The bartender asks, "What is a B and C?" "Bourbon and Coke," Packwood says. Cheney orders. "And, I'll have a G and T." The bartender asks, "What's a G and T?" "Gin and tonic," Cheney replies. Dubya wants to be cute, too. He says, "I'll have a 15." “OK,” the bartender asks, "What's a 15?" Dubya says, "A 7 and 7."

Fri, 10/14/2011 - 01:03 | 1772490 CrazyCooter
CrazyCooter's picture

I endorse this thread (not that it should be a regular occurence or anything - but it was a fun easter egg).

Wish I had a clever joke ...

Regards,

Cooter

Fri, 10/14/2011 - 01:08 | 1772501 Cliff Claven Cheers
Cliff Claven Cheers's picture

Did you hear Rynak's girlfriend said give me 12 inches and make it hurt. So Rynak fucked her 3 times and then hit her in the head with a rock.

Fri, 10/14/2011 - 02:43 | 1772592 The4thStooge
The4thStooge's picture

Barack O'Bama is now claiming that Ireland is his ancestral home. Kenya believe anything that guy says?

Fri, 10/14/2011 - 01:06 | 1772495 Cliff Claven Cheers
Cliff Claven Cheers's picture

Beer is better than Obama because when the beer is gone you are sad.

Fri, 10/14/2011 - 00:20 | 1772378 dark pools of soros
dark pools of soros's picture

right, the Jewwy kingmaker Rahm put a Muslim in the White House and disobeyed HQ

Thu, 10/13/2011 - 23:45 | 1772282 DavidPierre
DavidPierre's picture

 

JP Morgan beats expectations!

 "JP Morgan beats expectations" are the raving headlines this morning, I should say that this is "disingenuous" but I won't, rather I will tell the truth and call BULLSHIT because it is a LIE!

Mixed into Morgan's "better than expected" results are a couple sleight of hand laughers.

First, Morgan has taken $100 Million of previous writedowns back and claimed them as "earnings". ...And they did this why? Because things are getting better and they won't have the losses they expected earlier? Well...umm...things are not getting better according to the market place as Morgan's own survival is being judged as less likely as their bonds have dropped in value even as Treasury rates have declined.

...Which leads to the second Morgan WHOPPER! They also claimed as "income and revenue" $1.9 Billion that their own corporate bonds have declined in value! That's correct people, Morgan says that because they can buy their own bonds back for a lower price, they can book this as "profit". I must ask, did Morgan float these bonds in the first place because "they didn't need the capital"? Did they float the bonds so they could "buy them back at a profit" when they dropped in value? Do they even have the free and unencumbered capital (equity) to buy these bonds back? And if not, where does it come from?

Ihis so called "accounting" is criminal.

So they can make a judgement that "things aren't as bad as we thought" and magically create profit? And when the market makes a judgement that they are "more risky" and more likely to default they can magically claim THAT as income?

Why not just default on EVERYTHING, if they did this they could claim a quarterly profit of "infinity" as this is the inverse of zero!

I know, it doesn't work like this but I was just thinking... Actually, the Treasury could learn a lesson from Morgan and I really hope some of the "Ivy leaguers" in their employ have their eyes and ears open here. ...The Treasury could default on ALL of it's obligations (funded AND unfunded), book that as a quarterly profit ... do you see where this is leading? YES! And buy back ALL of it's pbligations for ZERO!

I think I may be on to something here...Treasury books a $100+ Trillion quarterly surplus, all obligations are then cancelled out AND what were debts and deficits are now equity and surpluses! I really wish someone could have stumbled on to this sooner as there would have been no need for the last 4 year's dreadful markets and no fear for the future. ...And if the U.S. took the lead in this and did it really fast then maybe the Greeks would catch wind of it and fix their problems too before they have to go through an embarrassing and unnecessary default!!!

And here I thought all along that I had a clue as to what was happening...I guess this is why common sense is so rare these days...who needs it!

www.lemetropolecafe.com

Thu, 10/13/2011 - 23:49 | 1772296 tekhneek
tekhneek's picture

You realize JP Morgan is shorting JP morgan, right?

I don't know how to explain this to people. It's so genius it's almost insane.

http://www.marketwatch.com/story/jp-morgans-bet-against-jp-morgan-2011-1...

Thu, 10/13/2011 - 23:52 | 1772301 Caggge
Caggge's picture

Should this be considered insider trading?

Fri, 10/14/2011 - 00:52 | 1772468 tekhneek
tekhneek's picture

No shit right? I just can't think of a more exponential way to profit from the biggest silver short position ever/and or ... horrible position in general than to short it into oblivion with all your excess cash.

Hard to believe big banks don't over-leverage this way in some instances but... I'm not by any means a banker though so I'm probably just nailing jello to  a wall and rambling.

Fri, 10/14/2011 - 06:15 | 1772697 augie
augie's picture

I'm probably just nailing jello to  a wall and rambling.

that is a hell of a lot more honest than citing "DVA" or "CVA" every five minutes to legitimize your blatent misrepresentations of the truth.

Just because the liar tells you they're lying, doesn't make the lie any less egregious.

Fri, 10/14/2011 - 00:55 | 1772473 knukles
knukles's picture

Should our leaders be considered competent?

Fri, 10/14/2011 - 06:27 | 1772708 stirners_ghost
stirners_ghost's picture

It's a perfectly sensible defensive tactic to ward off predators in the credit derivatives market. This market is a proper jungle which officious fucktards and political vampires have not yet totally spoiled with their "fixes", rules and regulations (which inevitably will benefit the wealthiest, most politically-connected players to the detriment of others).

Fri, 10/14/2011 - 00:04 | 1772333 adr
adr's picture

I wish I could be like a bank and take out an insurance policy to cover my own default.  could then spend myself a few million in debt, default, and then get paid the full amount I never actually made. 

Damn I should get the Nobel Prize in economics for that one.

Fri, 10/14/2011 - 00:50 | 1772457 LongSoupLine
LongSoupLine's picture

So Dimon shorts himself, then throws out statements through his army of "analysts" how the banking sector is struggling.  Upon the sell-off from the "brave and honest bankers" statements, they make money.

Quick, call Holder at the DOJ...no, wait...call Schapiro at the SEC...no wait...get a Super Panel together to...ahhhh shit, screw it... 

Fri, 10/14/2011 - 00:09 | 1772345 slewie the pi-rat
slewie the pi-rat's picture

tyler put up a piece about it this morning;  it's back on p.3 at this point

JPMorgan Uses Surge In Its Default Risk As A $1.9 Billion "Source" Of Revenue And Net Income

Fri, 10/14/2011 - 00:55 | 1772475 Yen Cross
Yen Cross's picture

PIECE? Off to Hong Kong! 

    Oh no , there goes Tokyo! Go Godzilla! ( Blue Oyster Cult).   Trade like a Viking.   I want bigger windows!

Fri, 10/14/2011 - 01:10 | 1772507 slewie the pi-rat
slewie the pi-rat's picture

room with a view

Thu, 10/13/2011 - 23:46 | 1772289 tekhneek
tekhneek's picture

Okay ZH. I officially love you.

I know we've known each other for a long time but... I've never felt this way about anybody.

Yours truly.

-Me

Thu, 10/13/2011 - 23:50 | 1772299 phraseshifter
phraseshifter's picture

" I an not a...cook!"

Thu, 10/13/2011 - 23:55 | 1772310 Restcase
Restcase's picture

Interesting that Benford's Law is used for fraud detection.

Here at ZH we have had even greater success with the Smell Test.

The Smell Test is not taught to economists and yet it has very powerful predictive features.

In fact, economists and statisticians distrust the Smell Test because so few of them can pass it.

Fri, 10/14/2011 - 00:07 | 1772335 UP Forester
UP Forester's picture

Maybe cuz they're to close to the B.O.?

Fri, 10/14/2011 - 00:10 | 1772347 Restcase
Restcase's picture

"Consider the source."

Thu, 10/13/2011 - 23:57 | 1772318 adr
adr's picture

Figuring out that the books are cooked is easy. Go to your favorite publicly traded retailer and ask how much they sold that day. At a large store like Dick's Sporting Goods they might say 6 or 7 thousand on a decent day, 2 or 3k on a slower day. Then proceed to tell him that based on the simple math of dividing stated sales on corporate documents by the number of stores and days in a year each store would need to sell over $25k a day to generate the claimed corporate revenue.

I'll think you'll get hit with a statement like, "I don't think we've ever sold that much in a day. Maybe Black Friday but I don't know."

What is even better is that the average transaction at Dick's is around $40 which means you needover 650 paying customers buying that amount every day. Have you ever seen that many people walk into a store like that and walk out with a shopping bag? I can believe Walmart up to a point.

So if a store does not generate the $25k the first day the amount under that sale level must be added to the next day and so forth and so on. It is concievable at the end of the year some stores may need to have repeat million dollar days to make up for the shortfall. Can you imagine a store counting a million dollars in sales at the end of a night?  It just really doesn't seem possible even on Black Friday.

So you may ask if retail sales can not explain stated revenue, how can the revenue to help juice that great stock price exist? Why the great accounting magic of selling to yourself. You divide your corporation into different divisions and book inventory shipped to stores as a sale. ou don't book your real full profit margin but something like 30%. When a product is actually sold you will book the remaining 30% so you can maintain a low margin across divisions. That way it makes it look like you input cost is very high and that your sky high prices are constrained by low profit margin.  The more inventory you take the greater profit you book at your top corporate level. Somehow this is all legal due to strange accounting rules and loopholes. Just like marking bond losses as profit, fun

Fri, 10/14/2011 - 00:01 | 1772326 Restcase
Restcase's picture

Do accountants ever go to jail?

Fri, 10/14/2011 - 00:52 | 1772466 sitenine
sitenine's picture

According to Sarbanes Oxley, the CEO and CFO are now required to unequivocally take ownership for their financial statements under Section 30.

So, the appropriate question is, "Do CEOs and CFOs ever go jail?"

Fri, 10/14/2011 - 02:07 | 1772562 zhandax
zhandax's picture

Only the token ones.  example: Enron

Fri, 10/14/2011 - 02:45 | 1772593 Alpha Monkey
Alpha Monkey's picture

Was that token or TBT ignore?

Fri, 10/14/2011 - 00:19 | 1772372 dumpster
dumpster's picture

or maybe a front for drug money laundering  sales

adr.

 

Fri, 10/14/2011 - 00:12 | 1772354 Gene8696
Gene8696's picture

I once did a similar test, based on how many "k"s I found in a bowl of alphabet soup..

Fri, 10/14/2011 - 00:23 | 1772382 UP Forester
UP Forester's picture

I did the same thing, but didn't find any "k"s.

Then I realized they were from China....

Fri, 10/14/2011 - 01:00 | 1772483 knukles
knukles's picture

The ones I had from China stuck to anything metal, the ones from Japan made my fingers tingle and gave off a soft but eerie glow and the ones from Greece smelled like butts.

Fri, 10/14/2011 - 00:14 | 1772358 zorba THE GREEK
zorba THE GREEK's picture

Using This index to detect fraud in a collective sense is plausible.

But using it to narrow down fraud to a particular company is not

realistic. A company would not likely alter more than a few numbers

fraudulently to achieve desired results and a few numbers changed

out of the thousands of numbers reported on a large company's

balance sheet would not be enough to cause it to be outside the

parameters of Benson's Law. ( I once taught a class on mathematical probability)

Fri, 10/14/2011 - 02:46 | 1772595 Chicago bear
Chicago bear's picture

If your assessment is accurate, it explains the rise in the index. No one firm gets caught yet all firms together help drive up the reported earnings.

Sat, 10/15/2011 - 12:19 | 1777041 Xavier Doe
Xavier Doe's picture

Zorba's assessment may be accurate, but what the hell is "Benson's Law"? :-)

Fri, 10/14/2011 - 06:42 | 1772729 Miss Expectations
Miss Expectations's picture

Would it work for election results?

Fri, 10/14/2011 - 09:15 | 1773064 Caggge
Caggge's picture

Only in Florida.

Fri, 10/14/2011 - 00:14 | 1772359 prains
prains's picture

it's like the anti-doping test for athletes but this time for geeks.  juiced, roided and ready to rage "where's my fucking bonus!"

Fri, 10/14/2011 - 00:15 | 1772366 Stockspeare
Stockspeare's picture

Yeah..cooked for sure. Exceptional work by ZH -yet again. Nobody does it better than ZH.

Fri, 10/14/2011 - 00:22 | 1772381 Stockspeare
Stockspeare's picture

ZH is "The Word on the Street". The work you guys do is just pure 'awesome". 100% The Best on The Street. Print it.

Fri, 10/14/2011 - 00:38 | 1772427 medicalstudent
medicalstudent's picture

now that is some funny shit.

 

Fri, 10/14/2011 - 01:00 | 1772484 Skyprince
Skyprince's picture

Clearly, if you're going to cook the books, hire someone who can assure the numbers you choose adhere to Benford's law.

Fri, 10/14/2011 - 01:07 | 1772497 Yen Cross
Yen Cross's picture

 Here is a good send off, as I hit 42!       http://www.youtube.com/watch?v=Tpy_pYXSpPA

Fri, 10/14/2011 - 01:10 | 1772508 TheLooza
TheLooza's picture

"Bacon Tastes Great" index still indicating that bacon tastes great.

Fri, 10/14/2011 - 01:42 | 1772542 chistletoe
chistletoe's picture

You might care to mention that the IRS has used Benford's law to sniff out fradulent forms

for many years ... its the first "red flag" test they apply to everyone ...

Its a very legitimate statistical tool.  If you do just a little background reading on it

(say, on Wikipedia) you ought to be able to understand better why it happens.

 

Seems like the SEC ought to be using it too, huh ....

Fri, 10/14/2011 - 03:10 | 1772616 swamp
swamp's picture


wouldent the difference be counted as income and subject to income tax ?
Isn.t unused depreciation added back as income when you sell a business, mine was !
Shouldent ALL the tax breaks they got now be added back as income ?
Forgiveness of credit card debt is added back to low income peoples income as additional income isn,t it ?
Not having equal justice under the law,isnt that justification for Revolution ?
How come Banks don’t have to count debt forgivness as income when the poor have to ?

 

Fri, 10/14/2011 - 03:20 | 1772624 pcrs
pcrs's picture

interesting study

Fri, 10/14/2011 - 05:32 | 1772681 JenkinsLane
JenkinsLane's picture

"Time was people used to cook the books, now they torture the books until they tell them the numbers they want to hear."

Fri, 10/14/2011 - 06:13 | 1772696 PaperBear
PaperBear's picture

This is yet another indication that people should be sceptical of governments.

Fri, 10/14/2011 - 07:15 | 1772773 Doode
Doode's picture

I wonder if it has anything to do with the rise of the consumer credit - which is an unnatural event :) http://research.stlouisfed.org/fred2/series/TOTALSL

Fri, 10/14/2011 - 08:53 | 1772969 NEOSERF
NEOSERF's picture

Only a 4x increase since 1980?...would have expected more from all those Harvard MBAs...but perhaps those are the people who are not "randomly" choosing numbers but have the smarts to pick just the right ones...

Fri, 10/14/2011 - 10:25 | 1773413 americanspirit
americanspirit's picture

I belive that the researcher's point is that when people go to make up numbers there is some kind of inherent bias in the brain that causes them to pick numbers in a pattern, and that if corporate or government numbers reporting shows that kind of pattern then there's a high probability they are 'cooked' numbers.

Makes sense to me. Kind of like how cops know you're lying when you look up and to the left before answering a question.

Simply put - people are not as clever or original as we think we are most of the time, and our deceptions run in patterns that can be easily detected by any careful observer. Great work Ms. Wang!

Fri, 10/14/2011 - 12:52 | 1774253 spanish inquisition
spanish inquisition's picture

Revenue looks spot on. Did anyone notice that the asset number shift from the 1 to 2 catagory, implying inflated assets?

Fri, 10/14/2011 - 13:30 | 1774408 tony bonn
tony bonn's picture

"Granted we doubt any regulator, least of all the corrupt criminal SEC, whose own Benford's law chart would look like a lie detector test hooked up to Jamie Dimon during a conference all, ..."

article and quote are pure zh gold

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