Abstract
Benford’s Law relies on a recently proven mathematical distribution about the frequencies of naturally occurring numbers that can be efficiently applied to the detection of financial fraud. Despite the value of Benford’s Law for detecting fraud, most financial professionals are often unaware of its existence and how to best utilise the method for fraud detection. The purpose of this paper is therefore to present a systematic methodology for incorporating Benford’s Law for detecting and flagging potentially fraudulent financial transactions, that can be further investigated. This paper describes the development of Benford’s Law and demonstrates how it can be implemented systematically through a spreadsheet program to detect potential fraud. Given that the cost of financial fraud is significant with firms losing up to a tenth of their revenues, the methodology presented in this paper for implementing Benford’s Law can be a valuable tool for auditors and other financial professionals for detecting fraud.
Highlights
A remarkable yet recent development in the field of accounting and finance over the past decade has been the recognition of the value of Benford’s Law in assisting accountants, auditors, regulators and other interested parties in detecting fraud in accounting numbers
PwC’s 2018 Global Economic Crime and Fraud Survey indicate that 49% of organisations globally reported that they have been a victim of fraud and economic crime, while 64% of respondents said losses due directly to their most disruptive fraud could reach US$1 million (Lavion, 2018)
This paper demonstrated a systematic methodology that can be used to apply Benford’s Law using Microsoft Excel to relatively large real-world datasets, containing thousands of individual transactions
Summary
A remarkable yet recent development in the field of accounting and finance over the past decade has been the recognition of the value of Benford’s Law in assisting accountants, auditors, regulators and other interested parties in detecting fraud in accounting numbers. Benford’s Law can be implemented without specialist audit software through the commonly available spreadsheet programs such as Microsoft Excel, Apple Numbers or the opensource Libre Office (Kyd, 2017; Pomykacz et al, 2017). This is a significant benefit as generalised audit software incorporating Benford’s Law is expensive and often beyond the reach of many smaller and medium sized organisations. The analysis and interpretation of the results of Benford’s Law is discussed, with the final section concluding with opportunities for further research in the application of Benford’s Law as a form of Digital Analysis
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
