Using Data Analysis to Catch Fraud

If you’ve ever thought you might need to find an auditing firm, this story might encourage to take the next step. Recently, a team of forensic accountants, who serve as financial detectives, started going through refunds that were issued by a national call center and found something might be askew. There were too many fours in the data, and it was their job to find out why.

It wasn’t that long ago that a subtle anomaly like that would have easily slipped by unnoticed, but as the Wall Street Journal reports, employee fraud is estimated to cost the country an estimated $300 billion a year, so forensic accountants are coming up with new ways to catch those who are trying to cheat.

In this case it seems, there were several hundred operators across the nation that were authorized to issue refunds up to $50, anything more than that required the permission of a supervisor. Due to the large number of refunds issued, there was the opportunity for theft, so the accountants took a further look into the validity of the payments using a test called Benford’s law.

The test is based on the fact that low digits are expected to occur far more frequently than high digits. According to the law, ones should account for 30% of leading digits, while each successive number should represent a progressively smaller proportion, with the nines coming last.

For certain operators, the refunds weren’t following this law. The accountants discovered a huge spike in the number of fours, leading them to believe there were a lot of refunds issued just below $50. They ultimately identified a number of operators who’d issued fraudulent refunds to themselves, friends and family members that totaled several hundred thousand dollars. Before the analysis took place, no one had a clue there was a problem.

Companies that find an auditing firm, employing them to examine their accounts, can potentially save an organization thousands of dollars, making capital markets more efficient and ensuring that if there is any cheating going on that it’s addressed right away.

Read the full article about how they caught fraud on the WSJ.

If you’d like to find an auditing firm contacting can help you get started in ensuring the financial health of your company in the most stress-free manner possible.