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Message Posted: Fri, 30 Jul 1999 @ 13:57:37 GMT


     
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Subj:   The use of Benford's Law in fraud detection
 
From:   John Hall

I recently sent this note to another list and it has resulted in some interesting conversation:

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There's an interesting article in a recent issue of NewScientist concerning the use of Benford's Law in fraud detection.

Benford's Law deals with the observation that no matter your source of numbers (ie- physics, accounting systems or census results), 30% of the numbers begin with 1, 18 percent will start with 2, down to 4.6% for numbers beginning with 9. The article is short and touches on the idea that numbers not following this trend can potentially indicate fraud.

BTW: You need to be careful of intelligent numbers (ie- UPC numbers or telephone numbers).

The article begins with the following:

ALEX HAD NO IDEA what dark little secret he was about to uncover when he asked his brother-in-law to help him out with his term project. As an accountancy student at Saint Mary's University in Halifax, Nova Scotia, Alex [not the student's real name] needed some real-life commercial figures to work on, and his brother-in-law's hardware store seemed the obvious place to get them.

Trawling through the year's sales figures, Alex could find nothing obviously strange about them. Still, he did what he was supposed to do for his project, and performed a bizarre little ritual requested by his accountancy professor, Mark Nigrini. He went through the sales figures and made a note of how many started with the digit 1. It came out at 93 per cent. He handed it in and thought no more about it.

Later, when Nigrini was marking the coursework, he took one look at that figure and realised that an embarrassing situation was looming. His suspicions hardened as he looked through the rest of Alex's analysis of his brother-in-law's accounts. None of the sales figures began with the digits 2 through to 7, and there were just 4 beginning with the digit 8, and 21 with 9. After a few more checks, Nigrini was in no doubt: Alex's brother-in-law was a fraudster, systematically cooking the books to avoid the attentions of bank managers and tax inspectors.

It was a nice try. At first glance, the sales figures showed nothing very suspicious, with none of the sudden leaps or dives that often attract the attentions of the authorities. But that was just it: they were too regular. And this is why they fell foul of that ritual he had asked Alex to perform.

The article can be found at:

www.newscientist.com...



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