Hidden Risk: Detecting Fraud in Chinese Banks’ Non-performing Loan Data

Mayo, Robert (2015): Hidden Risk: Detecting Fraud in Chinese Banks’ Non-performing Loan Data.

Abstract

Using self-reported data from banks in mainland China, I apply a technique used in forensic accounting based on Benford’s Law to detect fraudulent manipulation of non-performing loan (NPL) figures. I find large data anomalies consistent with false reporting in mainland banks that do not appear in an identically structured survey of Hong Kong banks. A comparison of different types of data from mainland banks shows no statistically significant anomalies in data for total deposits from customers, operating expenses, net interest income, or non-interest income.

• Item Type: MPRA Paper
• Language: English
• Keywords: China, banking, non-performing loans, fraud, Benford distribution.
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Benford, Frank. "The law of anomalous numbers." Proceedings of the American Philosophical Society 78, no. 4 (1938): 551-572.

Berger, Arno, and Theodore Hill. "Benford's Law Strikes Back: No Simple Explanation in Sight for Mathematical Gem." The Mathematical Intelligencer 33, no. 1 (2011): 85-91.

Carslaw, Charles. "Anomalies in Income Numbers: Evidence of Goal Oriented Behavior." The Accounting Review 63, no. 2 (April 1998): 321-327.

Donohue, Michael. "The South China Mall of misfortune." The National, June 12, 2008.

Durtsch, Cindy, William Hillison, and Carl Pacini. "The Effective Use of Benford's Law to Assist in Detecting Fraud in Accounting Data." Journal of Forensic Accounting 5 (2004): 17-34.

Hamlin, Kevin. "China's Desert Ghost City Shows Property `Madness' Persists." Bloomberg News, June 23, 2010.

Hill, Theodore. "A Statistical Derivation of the Significant-Digit Law." Statistical Science 10 (1995): 354-363.

Holz, Carsten. "Deconstructing China's GDP statistics." China Economic Review 15, no. 2 (2004): 164-202.

Huang, B. "Non-Performing Loan of China’s Banking System." The Bulletin of Institute for Research in Business and Economics (Meiji Gakuin University), no. 23 (2006): 129-152.

International Monetary Fund. "Global Financial Stability Report." 2013.

Krambeck, Holly. "Rise of the Chinese Ghost Town." The World Bank, July 12, 2010.

Lardy, NR. "‘The Challenge of Bank Restructuring in China." BIS Policy Papers (Bank for International Settlements) 7 (1999): 17-40.

Mehrotra, Aaron. "Comparing China’s GDP statistics with coincident indicators." Journal of Comparative Economics 39, no. 3 (2011): 406-411.

Minter, Adam. "China's Li Doesn't Believe His Own Numbers." Bloomberg View, March 5, 2014.

Newcomb, Simon. "Note on the Frequency of Use of the Different Digits in Natural Numbers." American Journal of Mathematics 4 (1881): 39-40.

Nigrini, Mark, and L Mittermaier. "The Use of Benford's Law as an Aid in Analytical Procedures." Auditing: A Journal of Practice and Theory, Fall 1997.

Okazaki, Kumiko. Banking System Reform in China The Challenges of Moving Toward a Market-Oriented Economy. RAND Corporation occasional paper series, National Security Research Division, Rand Corporation, Satna Monica, CA: Rand Corporation, 2007.

People's Bank of China. "People's Bank of China 2013 Annual Report." 2013.

Peston, Robert. "China: boom or bust?" BBC News, November 5, 2010.

Rauch, Bernhard, Max Göttsche, Gernot Brähler, and Stefan Engel. "Fact and Fiction in EU-Governmental Economic Data." German Economic Review 12, no. 3 (August 2011): 243-255.

Singleton, Tommie. "Understanding and Applying Benford’s Law." ISACA Journal (Information Systems Audit and Control Association) 3 (2011): 1-4.

Sinton, Jonathan. "Accuracy and reliability of China's energy statistics." China Economic Review 12, no. 4 (2001): 373-384.

Thomas, Jacob. "Unusual Patterns in Reported Earnings." The Accounting Review 64, no. 4 (October 1989): 773-787.

Turner, Grant, Nicholas Tan, and Dana Sadeghian. "The Chinese Banking System." The Reserve Bank of Australia Bulletin, September 2012.

Varian, Hal. "Benford's Law." The American Statistician, 1972: 65-66.