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The Application of Benford’s Law in Fraud Detection: A Systematic Methodology

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  • Nirosh Kuruppu

Abstract

Benford’s Law relies on a recently proven mathematical distribution about the frequencies of naturally occurring numbers that can be efficiently applied to the detection of financial fraud. Despite the value of Benford’s Law for detecting fraud, most financial professionals are often unaware of its existence and how to best utilise the method for fraud detection. The purpose of this paper is therefore to present a systematic methodology for incorporating Benford’s Law for detecting and flagging potentially fraudulent financial transactions, that can be further investigated. This paper describes the development of Benford’s Law and demonstrates how it can be implemented systematically through a spreadsheet program to detect potential fraud. Given that the cost of financial fraud is significant with firms losing up to a tenth of their revenues, the methodology presented in this paper for implementing Benford’s Law can be a valuable tool for auditors and other financial professionals for detecting fraud.

Suggested Citation

  • Nirosh Kuruppu, 2019. "The Application of Benford’s Law in Fraud Detection: A Systematic Methodology," International Business Research, Canadian Center of Science and Education, vol. 12(10), pages 1-10, October.
    • Handle: RePEc:ibn:ibrjnl:v:12:y:2019:i:10:p:1-10
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    References listed on IDEAS

    as
    1. Mark J. Nigrini, 2019. "The patterns of the numbers used in occupational fraud schemes," Managerial Auditing Journal, Emerald Group Publishing Limited, vol. 34(5), pages 606-626, May.
    2. Christoph Watrin & Ralf Struffert & Robert Ullmann, 2008. "Benford’s Law: an instrument for selecting tax audit targets?," Review of Managerial Science, Springer, vol. 2(3), pages 219-237, November.
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    More about this item

    Keywords

    auditing; benford’s law; forensic accounting; fraud detection;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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