Is Benford’s law used in forensic accounting?
Benford’s Law as a forensic accounting tool is truly a blend of the old and the new. The technology keeps advancing allowing us to cast a wider net with greater speed and precision. It is a complement to the best efforts of fraud investigators and attorneys alike and can be a powerful tool.
How is Benford’s law used in accounting?
Benford’s law is used to determine the normal level of number duplication in data sets, which in turn makes it possible to identify abnormal digit and number occurrence. Accountants and auditors have begun to apply Benford’s law to corporate data to discover number-pattern anomalies.
Why is it important for forensic accountants to know Benford’s Law?
Most naturally occurring data sets follow a strange rule called Benford’s Law. This rule allows you to predict how often each number 1 through 9 will appear as the first non-zero digit in the data set. Benford’s Law can be used to analyze financial data and identify red flags.
How reliable is Benford’s Law?
Unfortunately, my analysis shows that Benford’s Law is an unreliable tool. And, as one applies more sophisticated methods of estimation, the results become increasingly inconsistent. Worse still, when compared with observational data, the application of Benford’s Law frequently predicts fraud where none has occurred.
How is Benford’s Law used in auditing?
To apply Benford’s Law, therefore, an accountant must count the number of times a 1 appears as the lead digit in the data values, the number of times a 2 appears, etc., and then examine the resulting frequency distribution. The distribution is “natural” if it follows Benford’s distribution, and suspect otherwise.
Why does Benford’s Law occur?
Why? Because the Lognormal is ‘made of’ multiplications ! On a more profound level, the typical multiplicative form of the equations in physics, chemistry, astronomy, and other disciplines, as well as those of their many applications and results, lead to the manifestation of Benford’s Law in the physical world.
What is Benfords testing?
The first digit test compares the actual first digit frequency distribution of a data set with that developed by Benford. It is an extremely high-level test and will only identify obvious anomalies (i.e., it will only point you in the right direction).