Financial Accounting Blog

Tuesday, October 07, 2003

Using Software to Sniff Out Fraud. This BW article describes a new software program on the market that uses Benford's Law to look for breaks in statistical patterns of number sequences as a method to detect accounting fraud. The software can be used to identify made up numbers or repeated numbers that could be potential mistakes.
Forensic accounting" sleuths are taking advantage of sophisticated programs to catch the crooks in action. 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.

Large accounting firms tend to develop their own, proprietary software for forensic accounting that performs many of the same checks as off-the-shelf programs. And internal auditors at companies that want to do detective work on the cheap often use basic desktop applications such as Microsoft Excel and Access (a database management program) to hunt for fraud. For example, they might use those programs to identify duplicate payments to the same vendor.

While this software may be time consuming and costly, with recent accounting fraud scandals with Enron or Andersen Consulting, I think we will see a lot of technology advances to crack down on fraud. As the article mentions, companies themselves are already putting together their own software fraud detection systems. With the need and the number of people generating solutions on their own, I'll bet soon there will be a lower cost effective alternative that will become a common tool in the industry.