BENFORD'S LAW AND CORPORATE EMBEZZLEMENT
I have always loved numbers, mathematics and Gaming Theory. So I thought I would connect my love for numbersto a growing and serious problem, “Corporate Embezzlement”. Growing, like all crime due to the high unemployment and businesses cutting back on salaries, bonuses and other incentives. Serious, because it cuts deep into the corporate bottom line, usually goes on for a long time undetected and is typically committed by employees that are extremely intelligent and know just how to disguise their theft as a normal course of asset handling. Or do they?That’s where Benford's Law comes in to play. Never heard of it? Simply put, it states that in lists of numbers from many sources of real life data, the first digit of the list“1” occurs more frequently than “2” and so forth with the digit “9” only having a 5% probability of occurring as the first digit in the list of numbers. Without going in to all the logarithmic calculations, the fun part for me ( I know, I am not normal), it is possible to use this counter-intuitive law to look at data which may reveal possible corporate fraud. “Counter-intuitive” is the key to the possible detection of fraudulent activity. People who make up numbers tend to distribute their digits fairly uniformly and are even more so inclined when they are trying to avoid detection. A simple comparison of the first digit frequency as applied to Benford’s Law will show up any anomalous results warranting a closer examination. By trying t disguise their deception by making things look more random, they are actually doing the opposite.As recent as 2009, Benford's Lawwas used as evidence of fraud in the Iranian elections.To be fair, the discovery of this fact goes back to 1881 when astronomer Simon Newcomb noticed that the earlier pages in logarithm books, which started with “1” were more worn then the other pages. It wasn’t until 1938 that this was rediscovered and published by physicist Frank Benford.
Posted on Sat, March 3, 2012
by Ted DeMatteo