A free—and freely available—tool is useful for spotting potential financial misreporting that could lead to potential restatements, The Wall Street Journal reported.

That tool, Google Trends, tracks consumers’ online searches about retail products in real time. Top-selling retail products typically generate the most Google searches, so a misalignment between search volume and revenue growth may betray misrepresented sales figures, according to researchers at the Chinese University of Hong Kong in Shenzhen and Hong Kong, the UCLA Anderson School of Management, and California State University, Long Beach.

Their findings were published in the journal Accounting, Organizations and Society.

“We’re not saying that any time this happens, the reporting is bad,” said Siew Hong Teoh, an accounting professor at the UCLA Anderson School of Management and one of the researchers, in an interview with the  Journal. “But it means you have to look more carefully at why you would be reporting high revenues when people are really not interested in your product.”

Teoh and her colleagues used Google Trends to identify businesses that likely were managing revenue upward. They created a database of 1,900 publicly traded companies with products that showed up in Google searches from 2004 to 2020 and whose financial data for those years were available through the market database Compustat.

They computed the percentage year-over-year changes in the companies' quarterly Google search volume, then did the same calculation for their seasonally adjusted sales growth. 

They found that companies that ranked in the bottom quartile in their industry in search volume while reporting revenue in the top quartile accounted for about 5 percent of the companies analyzed. The average quarterly change in Google search volume was 1 percent, but search volume decreased by an average of 14 percent for these companies. The average quarterly sales decline for these companies was 4 percent, while the other companies showed an average growth of 6 percent.

These companies were found by the researchers to be 165 percent more likely than other businesses to subsequently restate, or correct, their revenue figures, and to have larger increases in revenue than their peers while simultaneously reporting fewer bad debts. The Journal said that these were two common ways for companies to manage their revenue upward.

Day traders and other investors could use the tool to determine how much confidence they should place in a company’s financial reports and to predict what the current quarter’s sales revenue will be, rather than focusing primarily on the previous quarterly report, Teoh told the Journal, adding that the metric also could help regulators, internal auditors and accounting firms to recognize when executives are providing fraudulent figures.

The Securities and Exchange Commission (SEC) should consider “setting up the information infrastructure to make this kind of exercise very accessible to anyone,” she said.