How Forensic Accountants Use Benfords Law to Detect Fraud, Why I Think This is Such An Awesome Feature of Forensic Accountants

How Forensic Accountants use Benfords law to detect fraud is actually no huge secret, and is very much public knowledge. In watching an episode of Ozark, the one where we go back in time to see Marty meeting with Del for the first time after going over his books, and after he finds that Del’s books have been cooked with nearly 100% certainty, Marty sits him down and speaks with him, telling him straight up that the books are cooked, and that basic “Benford’s law” basically outwits his attempt at laundering, as he’s got too many 9s, 8s and 7s in his number set, which is indicative of obvious fraud. I have been reading about this law obsessively all day, as I learned that it literally governs a huge amount of different things in nature. The length of Bananas, any natural number sets, transactions in a bank account, the distance of stars from earth, the distance of planets in the solar system from the sun, and even the number of Tik Tok likes across a large data set. It is kind of scary that this number exists, because it means that in nature there are by far more 1s than 9s, and that the numbers are not evenly distributed. In a natural number data set, here is the way that the set of first numbers in a data set should read.

1 – 30.1%

2 – 17.6%

3 – 12.5%

4 – 9.7%

5 – 7.9%

6 – 6.7%

7 – 5.8%

8 – 5.1%

9  4.6%

The rule goes even further however! It also looks at the second number in a data set, as well as the third number and the fourth number. And even the first two numbers, the first three numbers, it goes on and on! Forensic accountants use this as their base guide for EVERY single case that they take on to find where to look in terms of fraud. It’s like a magnifying glass for finding out if invoices are fraudulent or for finding out if someone is cooking the books. You use a software program to make a Benfords Law Chart, you see which numbers are out of wack in the curve, and then you start digging. You find transactions with that number scheme on it and you have a much more narrow data set to try and find fraudulent invoices, etc.

How Forensic Accountants Use Benfords Law to Detect Fraud? What Other Patterns Does This Law Agree With In Nature

Benford’s law stretches all the way across nearly every natural facet of nature. The length of bananas, likes on Tik Tok, distance between stars, distance from earth to stars, solar system miles from the sun, Sunflower seeds, honeycombs, Financial Transactions. Why this number sequence exists in the exact way it does is something that I have not been able to find an answer to, as I am not sure an answer exists. In the same way the Fibonacci sequence is found on flower pedals and other common elements of nature, Benfords law rings true to the point that it is the primary go-to for narrowing down transactions when trying to catch tax fraud, embezzlement or cleaning. One thing is for sure that I have learned when researching about this number recently, it is that there is so much we do not know about our infinite Universe, and it’s that nature is most definitely not RANDOM but is instead functioning on vibrations and rhythms like nothing we can even comprehend.

Why A Forensic Accountant Always Starts With This As Their Initial Indicator

The reason a Forensic Accountant starts with this indicator is that it can make fraud sometimes seem all to obvious. Even with the little I’ve been reading about this over the past day or so, and with the financial background that I currently have, if you gave me the books of a small business to audit, I could probably do some damage on it in terms of catching anomalies, even without the high tech software that Government agencies or Private Forensic Accounting Firms typically use. The easiest way to spot this is if you see invoice amounts that constantly have a lot of 7s, 8s and 9s as the first number in a set. Or if 1 is not ~30% or so of the first number in a set. If you see spike’s in a chart like 6 being 50% of the data set, or 9 being 50% of the data set, it doesn’t necessarily mean something untrue 100% of the time, but it is definitely a starting point for investigation. Maybe it’s something benign like a popular product or rent, or maybe it’s a loose string that you can pull on, such as bogus invoices that you can start interviewing towards.

Final Thoughts On How Forensic Accountants Use Benford’s Law to Detect Fraud

Overall, learning this law of nature over the past day or so has really given me some new insight into Forensic Accounting, and I am now extremely interested in the subject. I cannot wait to finish up my CPA license and then go for my CFE certification, I always wanted to be a financial expert and I am definitely heading in that direction. Thanks for reading.

Cheers!

*Inflation Hedging.com

Sources:

https://www.bankrate.com/banking/cds/cd-rates/

https://money.cnn.com/data/markets/

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