EZ-R Stats, LLC

This is 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 (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, compatible with Excel, is available at no charge to so this analysis.

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:

1. Detecting Irregularities in Insurance Claims
2. Highlighting Unusual Employee Expense Reports
3. Detecting possibly fraudulent tax returns
4. 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, which also include charts to better visualize the results.