An analysis of federal entities' compliance with public spending: applying the newcomb-benford law to the 1st and 2nd digits of spending in two Brazilian States

Abstract

The following question is investigated in this study: Are there significant deviations in the distribution of the 1st and 2nd digits of state public spending from the behavior predicted by the Newcomb-Benford Law (NB-Law)? The goal of this study is to detect the occurrence of significant deviations in the distribution of the 1st and 2nd digits of state public spending compared to the standard distribution defined in the NB-Law. This study develops an interdisciplinary and exploratory methodology to analyze 134,281 contracts issued by 20 management units in two states. An accounting model based on hypothesis testing was applied to analyze the data, thereby evaluating the conformity between the observed distribution and that predicated by NB-Law. This study showed that there were significant differences in the distribution of digits; the numbers 7 and 8 had excess occurrences, and 9 and 6 were rare occurrences compared to the proportions expected by the NB-Law for the 1st figure. This behavior denoted a tendency to avoid conducting the bidding process. The analysis of the 2nd digit, unprecedented for the Brazilian case, showed a significant excess of occurrences for the numbers 0 and 5, which indicated the use of rounding in determining the value of contracts. We show the feasibility, usefulness, and practicality of applying the NB-Law to the action of oversight bodies, particularly when planning an audit and determining the audited sample.