ACL

Fraud Tutorial3

BENFORD ANALYSIS

BENFORD’S LAW:
1. Red Flags-Unusual Leading Digits in Amounts: Load AR file. Benford’s Law
is based on the probabilities of the occurrences of each number as a leading digit
(or digits). It is a statistical look at the data to see if it is “NORMAL”, in this
respect. Go to ANALYZE -> Perform Benford Analysis, and run BENFORD on
the Amount field. Set the number of leading digits to “1”. From the More tab
select “ALL” and from the Output Tab select “Screen”.

(a) Explain the results you get.

Results:

As of: 09/11/2010 08:19:20

Command: BENFORD ON Amount LEADING 1 TO SCREEN

Table: Ar

2 zero amounts bypassed

Actual Count Expected Count Zstat Ratio
Leading Digits
1 231 232 0.023
2 75 136 5.685
3 85 96 1.167
4 70 75 0.502
5 82 61 2.740
6 88 52 5.184
7 42 45 0.332
8 51 39 1.818
9 46 35 1.771
 The larger the resulting Z-statistic, the more unlikely the occurrence. For example, a
Z-statistic of 1.96 has a significance of 0.05, representing the likelihood of a one time
in 20 occurrence, whereas a Z-statistic of 2.57 has a significance of 0.01, representing
the likelihood of a one time in 100 occurrence. The Zstat for the leading digit values
of 2, 5, and 6 indicate a very low probability that these values occurred by chance.

(b) When would you use BENFORD analysis to look for possibly fraudulent amounts?
Benford’s law has applications within fraud detection.  Those who commit fraud may
create fake payment amounts that “look” real.  However, unless the perpetrator knows
of the Benford’s law distribution, the made-up numbers will not follow the proper
curve, making the potential fraud easy to spot when the predicted and actual
distributions are compared.

A Benford’s law test may also identify user-manipulated data that are not necessarily
fraudulent.  For instance, the analysis may reveal an larger than predicted number of
$24 payments because employees are avoiding the trouble of obtaining supervisor
sign-offs for expenses of $25 or more.

The following are examples of accounting data sets that are candidates for Benford
analysys:

1) When a data set is comprised of a mathematical combination of numbers such as

price * Quantity (eg. AP and AR)

2) Transaction Data such as cash disbursements, expense items, and sales.

3) Large data sets

Benford Analysis is not useful on data sets that are comprised of assigned numbers
such as account numbers, employee numbers, zip codes, etc.)