Also known as the First-Digit Law or the Law of Anomalous Numbers, Benford’s Law describes the frequency distribution of leading digits in many sets of numerical data. It states that in many naturally occurring datasets, the smaller digits appear as the leading digit far more frequently than larger digits.
In simpler terms, the number 1 will appear as the first digit about 30% of the time, while the number 9 will appear as the first digit only about 4.6% of the time.
Practical Applications
One of the most well-known applications of Benford’s Law is in forensic accounting to detect fraud. Companies, government agencies and auditors use Bedford’s law to detect irregularities in financial data. Accounting records that contain fraudulent data often deviate from the patterns predicted by Benford’s Law. Auditors can apply Benford’s Law as a screening tool to identify areas where further investigation is necessary. If a dataset’s distribution of leading digits significantly deviates from what Benford’s Law predicts, it could signal potential manipulation.
Here is a practical example of analysis implementing Benford’s Law:
The bars in blue are the actual distribution of the first digits of a client’s accounting records. The anomalous spike in the first digit 4 drew attention. Upon further investigation, Our Experts determined the increase in the number 4 was caused by multiple transactions that were $499 and change. As it turns out, Our Client’s internal controls required that transactions over $500 receive additional authorizations. The fraudster was writing checks under $500 to avoid this control.
What Should I Do?
Hire an expert witness (like us). As an expert, we will save you time and money because:
- We are intimately familiar with the business accounting records, which we combines with informed financial analysis, like a Benford’s Law analysis.
- We have experience defending conclusions in deposition and at trial. We can provide expert witnesses testimony in a simple, efficient manner so that triers of fact can understand otherwise complicated subjects.
- Our Team have served as an expert in hundreds of matters across every imaginable industry.