Posted by Daniel Perez.
In “Accountants Increasingly Use Data Analysis to Catch Fraud,” Jo Craven McGinty highlights the rise in the use of mathematical and forensic procedures in the today’s audit industry. Americans are burdened with an estimated $300 billion a year due to employee fraud in the workplace. In the aftermath of large-scale fraud cases, such as Enron and WorldCom, audit firms are increasingly using more reliable audit procedures in their engagements to prevent such fraud cases from occurring again. Benford’s Law is the center focus of this article as it supports how similar procedures drives audit quality in the right direction.
In investigating refunds issued by a call center, a group of forensic accountants used Benford’s Law to detect employee fraud. Instead of traditional sampling used by auditors, the group of forensic accountants used Benford’s Law because it offers mathematical evidence that fraud may or may not be occurring: “According to Benford’s Law—named for a Depression-era physicist who calculated the expected frequency of digits in lists of numbers—more numbers start with one than any other digit, followed by those that begin with two, then three and so on.” In their testing of the refund amounts, the accountants expected to see a significant amount of refunds starting with “1,” followed by “2” and so on. The occurrence of refunds beginning with “4” were much more prevalent than it should have been according to Benford’s Law, raising the flag that fraud may be occurring. Applying similar procedures to Benford’s Law in the foundation of audits may grow to be a normal practice at some point in the future.
An application of the procedure to Enron’s financial statements portrays a clear variation from the normal results from Benford’s Law. McGinty’s article states that as computer programs, such as ACL, featuring forensic accounting procedures grow rampant in the marketplace, the use of these procedures does have a positive impact on future.
Article:
http://www.wsj.com/articles/accountants-increasingly-use-data-analysis-to-catch-fraud-1417804886
Daniel is a graduate accounting student at the Feliciano School of Business, Montclair State University, Class of 2016.