Benford's Law can be tested using an advanced digital analysis technique that involves examining the actual frequency of the digits in the data. The law calculates that numbers in sets of data with low first digits, such as 1, occur with more frequency than numbers with high first digits, like 8 or 9. Valid, unaltered data, without exceptional transactions, will follow the projected frequencies. Benford's law can be tested using this software which produces both charts and text reports.
Benford's law (principle) has been found to apply to many sets of financial data, including corporate disbursements. Audit software can employ digital analyses using Benford's law to identify fraud and other irregularities in accounts payable, income tax forms, claims payments and other disbursements. Audit software, which works with data in Excel, Access and text files, is available at no cost (open source - LGPL3) .
Conversely, data that meets the principles criteria, but fails to follow the expected frequencies, may include fraudulent items. It is very difficult for people to make up credible numbers, as invented numbers are unlikely to follow the law. Thus, this principle can be tested by the audit staff to spot irregularities, including possible error, fraud detection, or other anomalies.
The technique has been used in a variety of environments, including:
- Detecting Irregularities in Insurance Claims
- Highlighting Unusual Employee Expense Reports
- Detecting possibly fraudulent tax returns
- Fraud detection in medical insurance claims
This test provides the internal auditor with an efficient means of fraud detection by measuring an expected population distribution against the actual distribution. By highlighting selected transactions, vendors or other groups, the internal auditor/researcher is better able to isolate and focus on a target group, and therefore potentially be more productive in identifying errors or unusual transactions.
Testing of Benford's Law can be done using electronic work papers.
Benford's Law is just one of over 50 tests that can be run using Web CAAT, an open source audit software package.
The User Guide is available for download in PDF format. There is no license cost or restriction on use (LGPL license). The software handles Excel Workbooks (2003 and 2007), Access databases (2002 and 2007) as well as text format files (tab separated values, comma separated values).This is a web based system (intranet, internet or stand-alone), so only a browser is required to access it. Approximately 700 MB of disk storage is recommended with a minimum of 500 MB of memory. More information.
Supported browsers include Internet Explorer, FireFox, Google Chrome, Opera and Safari.