Tax: Statistical tests - Vital statistics

The Revenue uses the Chi Squared test to check whether taxpayers are acting honestly, or whether they may be falsifying their accounts. This is because the Chi Squared test is a statistical method for comparing expected and actual results. However, through research it was discovered that the Revenue...

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Bibliographic Details
Published in:	Accountancy Vol. 133; no. 1327; p. 108
Main Author:	Williamson, Duncan
Format:	Trade Publication Article
Language:	English
Published:	London The Financial Times Limited 01-03-2004
Subjects:	Corporate taxes Errors Frequency distribution Probability Retail stores Statistical analysis United Kingdom > UK
Online Access:	Get full text
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Summary:	The Revenue uses the Chi Squared test to check whether taxpayers are acting honestly, or whether they may be falsifying their accounts. This is because the Chi Squared test is a statistical method for comparing expected and actual results. However, through research it was discovered that the Revenue seems to be applying the Chi Squared test without reference to Benford's Law. This is a potentially problematic approach when analysing business accounts. Benford's Law says that given a set of 4 numbers, the probablility that the first digit will be 1 is not 1 in 9, but actually 30.1% (almost 1 in 3); the probability of the second digit being 2 is 17.6%, and the chances decline all the way to 9, which only has a probability of 4.6%. The basic problem with the Revenue's analysis is that it fails to appreciate that sales data comprises numbers of varying length.
ISSN:	0001-4664