Benford's Law: A Real Life Case Study

By Pete Miller, CFE, CPA
Shareholder, Clark Nuber

Benford’s Law is an example of data analysis, sometimes referred to as data mining or data monitoring. Accounting systems are churning out gobs of data these days, and without consistent and organized data analysis, it is just too easy to hide even unsophisticated schemes. The mice are indeed getting smarter, so the mousetraps you used in the past won’t cut it in today’s environment. Data analysis, dashboards, and other tools are a great way to advance your internal control systems and stay ahead of the fraudsters.

I recently wrote a piece on my company’s blog that gave the basics on Benford’s Law. Most of you likely are familiar with Benford’s Law in your fraud examinations.  I am a big believer in practical application as a tool in learning any new concept, so with that in mind, I wanted to provide an example of how to apply this law based on one of my old case files.  

The main facts you need to know for this example are: 

• the business had two subsidiaries, so you will see two sets of Benford charts; 
• funds seemed to be leaking out of these subsidiaries; and 
• the check-writing or cash disbursement cycle seemed to be the source of that leak.  

Check registers are key sets of data to which a Benford’s Law analysis can be applied. For each of the two subsidiaries, we obtained check registers from the accounting system that spanned approximately 10 years, resulting in approximately 16,000 checks for each subsidiary (32,000 in total) –  definitely a large enough sample for the Benford distribution to be distinct and clear.  

After running this analysis, what I found was very interesting. It is represented in the two charts below.  

As you can see, the 3-digit column sticks out and is high relative to the Benford curve for both charts. The 2-digit column sticks out as well and is relatively high, but only in the second chart. These results prompted me to drill down into each of the three columns. 

I began to analyze the subsets of data and found that certain vendors had an unusual volume of checks written to them; several vendors had 200 or more checks written to them over this period of time. The other thing I quickly noticed was that many of the vendors with these high volumes had “do not use” included in the vendor name field. That seemed very unusual. I typically expect that this kind of label would be a signal to not use that vendor and that it would also hopefully lead to the eventual removal of that vendor from the master list.  

With these two questions in front of me, I continued digging. Next, I looked at the greater population of checks to see how much total volume was written to these “do not use” vendors over the years. What I found was absolutely staggering.  

A single vendor, in a population of more than 16,000 checks spanning a period of 10 years, had over 1,400 checks written to them over a period of just three years. Nearly 10 percent of the total checks were written to this single vendor, in just one-third of the time. The other entity had more than 1,700 checks written to one vendor over a period of five years. How is that possible? That doesn’t just happen naturally in most businesses. There must be some other reason.

Unfortunately, I am not in a position to share the end results. But, I can say that it led to further investigation, which is the point of Benford’s Law. In and of itself, a Benford’s Law analysis will not produce a smoking gun, but it will shine a light on the cloud of smoke, and if you follow that cloud of smoke, you might find the smoking gun. This is a fine example of the process in action.

Maintaining Strong Ethical Culture is All in a Day's Work

MEMBER PROFILE

Dora Gomez, CFE, Global Fraud Officer, AXA Tech 
Jersey City, N.J.

Dora Gomez, CFE, a native New Yorker, began an early passion for travel, thanks to her parents, and was even a DJ for four years during college. But it was Gomez's passion for fighting fraud that led her to her current position as Global Fraud Officer at AXA Tech.

Where were you born and raised?

I was born in Brooklyn, New York, a first-generation American to Ecuadorian parents. I grew up in a multi-cultural neighborhood, which taught me to build friendships with people of other ethnicities. I also learned to love an array of international foods, which I appreciate to this day. At heart, I am still a true New Yorker.   

How did you become passionate about fighting fraud?

I think I always had the "bug" inside of me to fight fraud. When I worked in public accounting and internal audit I was exposed some cases of fraud and learned how to spot the signs of fraud. It’s vital for the company to have strong ethical principles where employees feel empowered to speak up when something seems wrong. It’s not just about the company’s reputation, it also about working for a company we feel proud to be a part of.

What is your personal motto?

Take risks in life, be confident, and don’t underestimate yourself. I learned that during an expat assignment in Paris. Not only was it an eye opener to learn how the company functioned at the headquarter level, but I also learned about the French culture and those of other European countries. I overcame obstacles (not speaking French, making new friends, working with new colleagues, etc.) but tackled them and learned from that experience. The only constants that I brought with me were my two small dogs … that also learned to bark in French!

What do you consider your greatest achievement to date?

I don’t know if I can actually name one great achievement. I think I did pretty well in my career and personal life for a middle class ‘kid’ from Brooklyn, NY. Let’s face it, being a minority and a woman has its challenges and tackling them requires persistence and determination. I have overcome many obstacles in life (both personal and work related), and I am proud and happy with the person I am today.

Read Gomez's full profile on ACFE.com in the Career Center.

The Countdown to Fraud Week 2012

GUEST BLOGGER

Scott Patterson
ACFE Senior Public Relations Specialist

International Fraud Awareness Week, Nov. 11-17, is just a month away, and we’ve hit another milestone. There are now more than 700 organizations signed up as Official Supporters for this important grassroots effort. I’ve been hearing a lot of exciting things about what people are planning for Fraud Week this year.

The ACFE Utah Chapter is teaming up with Exactech Forensics LLC to host a workshop luncheon for members and local companies to share ideas on how to increase fraud awareness.

In Nebraska, the ACFE Heartland Chapter and Blue Cross Blue Shield (BCBS) of Nebraska are supporting the movement – and Susan Rainey Biler, CFE, AHFI, special investigations administrator for BCBS of Nebraska informed me that Nebraska Governor Dave Heineman is declaring Nov. 11-17 International Fraud Awareness Week in the state.

In Ohio, Franklin University, the National White Collar Crime Center, the Ohio Ethics Commission, the Ohio Inspector General’s Office and the Ohio Investigators Association will present a two-day training conference:  “Targeting Fraud – Safeguarding Integrity.”

We have added some new resources to FraudWeek.com to help you make the most of this year’s campaign. "Designing an Effective Anti-Fraud Training Program" is a new PDF guide that provides tips and special considerations for developing an anti-fraud training program for your employees.

A few weeks ago, I received a call from Larry Benson at LexisNexis regarding their new “Fraud of the Day” forum.  It is a can't-miss resource dedicated to educating government about how fraud is perpetrated and solutions to stop it. I encourage those dealing with government fraud to visit the site and sign up for their daily email; you will also find commentary, links to upcoming events, resources pertaining to government fraud and expert video commentary.

On FraudWeek.com we have the latest customizable press release and Fraud Week logo to help you publicize your support. Find the full list of resources at FraudWeek.com/Resources.

Remember, there are different ways to get involved. Consider the following:

• Hold a free fraud prevention seminar in your community, or for your employees and/or clients. Or offer to speak to a local business group, or to university students enrolled in business, management and accounting courses about the importance of being trained in the detection and prevention of fraud.
• Send an email to clients outlining the risks and cost of fraud. Encourage them to reduce their fraud risk. Include fraud awareness articles and information in employee newsletters and other communications.
• Engage in social media before and during Fraud Week. Promote the importance of fraud awareness, and use our Twitter hashtag, #FraudWeek. Stay tuned to ACFE Insights and other ACFE social media channels for updates.

To share your events and materials, please feel free to email me at spatterson@acfe.com. It is just a month away – the countdown to Fraud Week begins.