The Better Way of Applying Benford’s Law for Fraud Detection

Applying Benford’s Law on large collections of data is an effective way of detecting fraud. In this article, we?ll introduce you to Benford’s Law, talk about how auditors are employing it in fraud detection, and introduce you to a more effective way of integrating it into an IT solution.

Benford’s Law in a nutshell

Benford’s Law states that certain data sets – including certain accounting numbers – exhibit a non-uniform distribution of first digits. Simply put, if you gather all the first digits (e.g. 8 is the first digit of ?814 and 1 is the first digit of ?1768) of all the numbers that make up one of these data sets, the smallest digits will appear more frequently than the larger ones.

That is, according to Benford’s Law,

1 should comprise roughly 30.1% of all first digits;
2 should be 17.6%;
3 should be 12.5%;
4 should be 9.7%, and so on.

Notice that the 1s (ones) occur far more frequently than the rest. Those who are not familiar with Benford’s Law tend to assume that all digits should be distributed uniformly. So when fraudulent individuals tinker with accounting data, they may end up putting in more 9s or 8s than there actually should be.

Once an accounting data set is found to show a large deviation from this distribution, then auditors move in to make a closer inspection.

Benford’s Law spreadsheets and templates

Because Benford’s Law has been proven to be effective in discovering unnaturally-behaving data sets (such as those manipulated by fraudsters), many auditors have created simple software solutions that apply this law. Most of these solutions, owing to the fact that a large majority of accounting departments use spreadsheets, come in the form of spreadsheet templates.

You can easily find free downloadable spreadsheet templates that apply Benford’s Law as well as simple How-To articles that can help you to implement the law on your own existing spreadsheets. Just Google “Benford’s law template” or “Benford’s law spreadsheet”.

I suggest you try out some of them yourself to get a feel on how they work.

The problem with Benford’s Law when used on spreadsheets

There’s actually another reason why I wanted you to try those spreadsheet templates and How-To’s yourself. I wanted you to see how susceptible these solutions are to trivial errors. Whenever you work on these spreadsheet templates – or your own spreadsheets for that matter – when implementing Benford’s Law, you can commit mistakes when copy-pasting values, specifying ranges, entering formulas, and so on.

Furthermore, some of the data might be located in different spreadsheets, which can likewise by found in different departments and have to be emailed for consolidation. The departments who own this data will have to extract the needed data from their own spreadsheets, transfer them to another spreadsheet, and send them to the person in-charge of consolidation.

These activities can introduce errors as well. That’s why we think that, while Benford’s Law can be an effective tool for detecting fraud, spreadsheet-based working environments can taint the entire fraud detection process.

There?s actually a better IT solution where you can use Benford’s Law.

Why a server-based solution works better

In order to apply Benford’s Law more effectively, you need to use it in an environment that implements better controls than what spreadsheets can offer. What we propose is a server-based system.

In a server-based system, your data is placed in a secure database. People who want to input data or access existing data will have to go through access controls such as login procedures. These systems also have features that log access history so that you can trace who accessed which and when.

If Benford’s Law is integrated into such a system, there would be no need for any error-prone copy-pasting activities because all the data is stored in one place. Thus, fraud detection initiatives can be much faster and more reliable.

You can get more information on this site regarding the disadvantages of spreadsheets. We can also tell you more about the advantages of server application solutions.

Check our similar posts

Web Analytics

There’s a vast ocean of raw customer data on the Web. Ever thought of the implications if somehow you could harness all that data and transform it into useful information? Information that perhaps you can use in your SEO (Search Engine Optimisation) and conversion optimisation?

There are web analytics tools you can employ for these purposes. But using web analytics tools will only win you half the battle. You’ll have to be proficient in configuring these tools to generate insightful and actionable results out of them. A poorly configured tool can produce confusing or even misleading information.

Our web analysts possess the expertise to configure and use web analytics tools, as well as analyse results and leverage information obtained from them.

These are the things we can do to help you take advantage of web analytics.

  • Discuss with your managers to establish your specific goals, to determine what specific data we have to collect/analyse and to plan out how to go about with the entire process.
  • Help you select an appropriate tool, install it and set optimal configurations including page tags, filters, funnels, reports and others.
  • Wield the full force of your analytics tool(s) to make sound business decisions.
  • Monitor the entire web analytics system and implement adjustments when needed.
2015 ESOS Guidelines Chapter 7, 8 & 9 – Sign-Off, Compliance & Appeals

This is the final chapter in our series of short posts summarising the quite complex ESOS guidelines (click on ?Comply with ESOS? to see the details). This one addresses the legalities to follow to complete your report – and how to appeal if you are not happy with any of the Environment Agency?s decisions.

  1. Director Sign-Off

This is by no means an easy ride. Confirmation of the work at individual or lead assessor level locks the company into the penalty cycle in the event there are significant irregularities. By signing off the assessment, the board level director(s) # agree that they have

  • Reviewed the enterprise?s ESOS recommendations
  • Believe the enterprise is within the scope of the scheme
  • Believe the enterprise is compliant with the scheme
  • Believe the information provided is correct

Having an internal assessor requires a second board-level signature.

  1. Compliance

You report compliance on the internet. This is free and you can do it at any time within the deadline. You can dip in and out of the process as many times as you wish, but must use the link in the receipting email. While this is something a board member must do, there is no reason why the lead assessor should not complete the basics. The online compliance notification addresses the following topics:

  • The ESOS contact person in the enterprise
  • Any aggregation / dis-aggregation during the period
  • The names and contact details of the lead assessor
  • The proportion of energy consumption per compliance route

The Environment Agency will acknowledge receipt. This does not constitute acceptance. You should keep the ESOS evidence pack in a safe place with at least one backup elsewhere.

  1. Compliance & Enforcement Issues

In the event the Environment Agency decides your enterprise has not met ESOS requirements, it may either (a) issue a compliance notice with instructions, or (b) apply one of the following civil penalties:

  • A fine of up to ?5,000 for failure to maintain records
  • A fine of up to ?50,000 for failure to undertake an energy audit
  • A fine of up to ?50,000 for a false or misleading statement

Any enterprise has the right of appeal against government decisions. In the case of ESOS, this is via:

  • The First-Tier Tribunal if your enterprise is England, Wales or off-shore based
  • The Scottish Minister if your enterprise is based in Scotland
  • The Planning Commission if your enterprise is Northern Ireland-based

The notice you appeal against will supply details of the appeal steps to take.

This blog and its companion chapters concerning the ESOS Guidelines as amended 2015 are with compliments of ecoVaro. We are the people who break ESOS data into manageable chunks of information, so that board-level directors have greater confidence in what they sign.

The Better Way of Applying Benford’s Law for Fraud Detection

Applying Benford’s Law on large collections of data is an effective way of detecting fraud. In this article, we?ll introduce you to Benford’s Law, talk about how auditors are employing it in fraud detection, and introduce you to a more effective way of integrating it into an IT solution.

Benford’s Law in a nutshell

Benford’s Law states that certain data sets – including certain accounting numbers – exhibit a non-uniform distribution of first digits. Simply put, if you gather all the first digits (e.g. 8 is the first digit of ?814 and 1 is the first digit of ?1768) of all the numbers that make up one of these data sets, the smallest digits will appear more frequently than the larger ones.

That is, according to Benford’s Law,

1 should comprise roughly 30.1% of all first digits;
2 should be 17.6%;
3 should be 12.5%;
4 should be 9.7%, and so on.

Notice that the 1s (ones) occur far more frequently than the rest. Those who are not familiar with Benford’s Law tend to assume that all digits should be distributed uniformly. So when fraudulent individuals tinker with accounting data, they may end up putting in more 9s or 8s than there actually should be.

Once an accounting data set is found to show a large deviation from this distribution, then auditors move in to make a closer inspection.

Benford’s Law spreadsheets and templates

Because Benford’s Law has been proven to be effective in discovering unnaturally-behaving data sets (such as those manipulated by fraudsters), many auditors have created simple software solutions that apply this law. Most of these solutions, owing to the fact that a large majority of accounting departments use spreadsheets, come in the form of spreadsheet templates.

You can easily find free downloadable spreadsheet templates that apply Benford’s Law as well as simple How-To articles that can help you to implement the law on your own existing spreadsheets. Just Google “Benford’s law template” or “Benford’s law spreadsheet”.

I suggest you try out some of them yourself to get a feel on how they work.

The problem with Benford’s Law when used on spreadsheets

There’s actually another reason why I wanted you to try those spreadsheet templates and How-To’s yourself. I wanted you to see how susceptible these solutions are to trivial errors. Whenever you work on these spreadsheet templates – or your own spreadsheets for that matter – when implementing Benford’s Law, you can commit mistakes when copy-pasting values, specifying ranges, entering formulas, and so on.

Furthermore, some of the data might be located in different spreadsheets, which can likewise by found in different departments and have to be emailed for consolidation. The departments who own this data will have to extract the needed data from their own spreadsheets, transfer them to another spreadsheet, and send them to the person in-charge of consolidation.

These activities can introduce errors as well. That’s why we think that, while Benford’s Law can be an effective tool for detecting fraud, spreadsheet-based working environments can taint the entire fraud detection process.

There?s actually a better IT solution where you can use Benford’s Law.

Why a server-based solution works better

In order to apply Benford’s Law more effectively, you need to use it in an environment that implements better controls than what spreadsheets can offer. What we propose is a server-based system.

In a server-based system, your data is placed in a secure database. People who want to input data or access existing data will have to go through access controls such as login procedures. These systems also have features that log access history so that you can trace who accessed which and when.

If Benford’s Law is integrated into such a system, there would be no need for any error-prone copy-pasting activities because all the data is stored in one place. Thus, fraud detection initiatives can be much faster and more reliable.

You can get more information on this site regarding the disadvantages of spreadsheets. We can also tell you more about the advantages of server application solutions.

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