Benford's Law

[veritas]

I was reading a forensic accounting report for a ponzi case and came across this term in the report.

What I gleaned from it was the fact that their are mathematical formulas for liars and sloppy accounting.

Intuitively I have known this and you probably have seen it. Usually when a client provides amounts for business income and expenses and all numbers are rounded and too many end with a zero. Worse than that is when the amounts all end with one zero, two zeros or three zeros. My old saying was one zero=guessing. Two zeros=lying. And three zeros=fraud.

Not only that but the leading numbers have a mathematical possibility of occuring and if certain digits appears too few times in a set of data that would indicate a problem.

Fascinating.

http://www.rexswain.com/benford.html

[erchess]

Programmer's Paridise

Someone is going to write a program. The program will let a person who is committing a fraudulent return enter a realistic minimum and maximum for each value that is to be faked and the program will spit out a set of data that conforms to this law, but not so perfectly as to arouse suspicion, and minimizes the individual's tax. The program may not be sold legally or openly (although I think it will be sold that way) bit I am sure that it will sell. Probably the way the program will work is that it will tell you to enter your "best estimate" of each number and then it will change them in such a way that the numbers conform to this law and the bottom line is not significantly changed. The stated purpose of the program will be "not to help you cheat but to help you avoid unfair accusations."

[JG EA]

...My old saying was one zero=guessing. Two zeros=lying. And three zeros=fraud.

...

Years ago one of my clients knew I rounded the numbers she gave me, so she started rounding everything herself. (Rounded expenses up to the nearest $100.00.) She was then required to get the actual numbers and let me do the rounding. But I like the above formula. I discovered down the road that the "two zero" equivalent was a family trait.

[DaveO]

Very interesting study. I do a little forensic accounting once in a while. Confronted with an array of numbers this would be one more tool to use in selection.