Tuesday, August 6, 2013

Benford Analysis as an Investigation Tool

Benford's Law Analysis is a tool that can help alert professionals such as accountants, auditors or fraud investigators when evaluating accounting data sets.  The results of the analysis may highlight possible occurrence of errors, potential fraud, manipulative biases, costly processing inefficiencies or other types of irregularities. Benford's Law, which is also called the First-Digit Law, refers to the frequency distribution of digits in many (but not all) real-life sources of data. In this distribution, the number 1 occurs as the leading digit about 30% of the time, while larger numbers occur in that position less frequently: 9 as the first digit less than 5% of the time. This distribution of first digits is the same as the widths of grid-lines on a logarithmic scale (i.e. a scale which has been mathematically developed). Benford's Law also concerns the expected distribution for digits beyond the first, which approach a uniform distribution.  The Benford analysis can be used to evaluate business transactions involving (but not limited to): Credit card transactions, Purchase orders, Loan data, Customer balances, Journal entries, Stock prices, Accounts payable transactions, Inventory prices and Customer refunds.  (Source: Mark Nigrini, May 1999; Journal of Accountancy)