Introduction: –
Would you believe, if I say numbers would help you detect fraud? Yes, it’s true Physicist Frank Benford in year 1938 first observed that in a large numerical data set the frequency of leading digit starting with 1 is around 30% and for numbers starting with 9 have the least frequency of less than 5%. According to his theory if the appearance of left most digit deviates from below mentioned frequency then in that particular numbers there is higher chances of fraud.
Digits | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
Frequency | 30.1 | 17.6 | 12.5 | 9.7 | 7.9 | 6.7 | 5.8 | 5.1 | 4.6 |
Now let’s understand the application of benford’s law and how it can help auditor to detect error or frauds.
Application of Benford’s Law: –
In recent year use of benford law have increased for various reasons and now let’s understand the application of the law in various fields :-
- Financial Auditing
Benford’s law is of great use to auditors. It helps them to identify any dicrepancies or irregularities in financial data that might lead to detection of fraud and error. Auditor can check for any deviation from the expected distribution that can signal area of further investigation.
- Tax Compilance
Benford’s law helps the tax authorities to analyse the tax return data and to find the anomalies in the data which could help them to detect potential tax evasion or the inaccurcy in the return.
- Fraud Detection
Benford’s law is one the best and most used law to detect fraud or error in a large numerical data set. It helps detect financial fraud where the financial numbers are manipulated. It is also a used as fraud detection tool by the forsenic auditor.
- Digital Forensic
Benford’s law is of great use in digital forensic to analyse datasets related to digital transactions or evidence. It helps the investigator to detect fraudulent activity from the large dataset of digital transaction.
- Quality Control
The law helps in quality control process to find the accuracy and relaibility of production or manufacturing data. Deviations from the expected digit may help highlight the area that need attention so that the quality control process can improve.
Role of Benford’s Law in Audit Field
Conclusion
Benford’s Law is great versatile tool in field of data analysis which helps auditor to detect fraud or error and also gives great insight on various field. It has various pratical application like financial auditing and fraud detection in the tax field. In an era where the data is paramount, the use of benford law helps the analyst to detect anamolies in the data. Benford’s Law remains a foundational tool for detecting fraud or error in the large numerical data set there by providing a great insight on the data.
(This article represents the views of the authors only and does not intent to give any kind of legal opinion on any matter)
Authors:
Parth Bhikadiya
Associate Consultant| +918355882127|parth.bhikadiya@masd.co.in|LinkedIn profile