Financial Accounting Blog

Tuesday, September 30, 2003

Using Software to Sniff Out Fraud. This BW article is about accounting softwares and frauds. Especially, the first part is very impressive. Author mentioned a mathematical law, " Benford's Law." It's statistic data, but not only accounting. Just glance even first part.
In the 1920s, Frank Benford, a physicist at General Electric (GE ), discovered an astonishing mathematical law: In just about any given set of numerical data, numbers occur as the first or second digit at a predictable rate. For example, "1" will appear as the first digit 31% of the time, but "9" will appear first only 5%. While that sounds unlikely, Benford tested lists of numbers from many different sources -- accounting ledgers, geographic data, even magazine articles -- and found that the same probability persisted.

Applied to accounting, Benford's Law makes for a great way to check to see if numbers are fabricated (since when liars make up figures, they usually don't follow the same statistical pattern Benford identified). The law is now enjoying booming popularity as the basis for a fairly easy, routine test that's used to uncover accounting fraud. Easy, that is, if you have a sophisticated software package and enough high-powered computers to crunch numbers from reams of documents.