Write a 1-2 page summary of the article. Summarize the key points and ideas of the article. (What is Benford's Law, How can it be used in accounting, what are the facts of the example presented in the article, etc.)

Accountants increasingly use data analysis to catch fraud

When a team of forensic accountants began sifting through refunds issued by a national call center, something didn?t add up: There were too many fours in the data. And it was up to the accountants to figure out why.

Until recently, such a subtle anomaly might have slipped by unnoticed. But with employee fraud costing the country an estimated $300 billion a year, forensic accountants are increasingly wielding mathematical weapons to catch cheats.

?The future of forensic accounting lies in data analytics,? saidTimothy Hedley,afraud expertat KPMG, the firm that did the call-center audit.

In the curious case of the call centers, several hundred operators across the country were authorized to issue refunds up to $50; anything larger required the permission of a supervisor. Each operator had processed more than 10,000 refunds over several years. With so much money going out the door, there was opportunity for theft, and KPMG decided to check the validity of the payments with a test called Benford?s Law.

ENLARGE

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.

?The low digits are expected to occur far more frequently than the high digits,? said Mark J. Nigrini, author ofBenford?s Law: Applications for Forensic Accounting, Auditing, and Fraud Detectionand an accounting professor at West Virginia University. ?It?s counterintuitive.?

Most people expect digits to occur at about the same frequency. But according to Benford?s Law, ones should account for 30% of leading digits, and each successive number should represent a progressively smaller proportion, with nines coming last, at under 5%.

In their call-center probe, Mr. Hedley and his colleagues stripped off the first digits of the refunds issued by each operator, calculated the frequencies and compared them with the expected distribution.

?For certain people answering the phones, the refunds did not follow Benford?s Law,? Mr. Hedley said. ?In the ?four? category, there was a huge spike. It led us to think they were giving out lots of refunds just below the $50 threshold.?

The accountants identified a handful of operators?fewer than a dozen?who had issued fraudulent refunds to themselves, friends and family totaling several hundred thousand dollars.

That?s a lot of $40 refunds. But before running the Benford analysis, neither the company nor its auditors had evidence of a problem.

Getting the accounting profession to adopt Benford?s Law and similar tests has been a slow process, but Mr. Nigrini has spent two decades inculcating Benford?s Lawin the accounting and auditing community, promoting it through articles, books and lectures.

?It has the potential to add some big-time value,? saidKurt Schulzke,anaccounting professorat Kennesaw State University in Georgia. ?There has not been much innovation in the auditing profession in a long time, partly because they have ignored mathematics.?

Now, the Association to Advance Collegiate Schools of Business emphasizes the importance of analytical capabilities. Off-the-shelf forensic-accounting software such as IDEA and ACL include Benford?s Law tests. Even the Securities and Exchange Commission is reviewing how it can use such measures in its renewed efforts to police fraud.

Recently, at the invitation of the agency,Dan Amiram,an accounting professor at Columbia University, and his co-authors Zahn Bozanic of Ohio State University andEthan Rouen,a doctoral student at Columbia, demonstratedtheir methodfor applying Benford?s Law to publicly available data in companies? income statements, balance sheets and statements of cash flow. For example, a look at Enron?snotorious fraudulent accounting from 2000 showed a clear variation from Benford?s Law.

?We decided to take a different approach,? Mr. Amiram said. ?Those are the main financial statements that companies report.?

Auditors, who are employed by companies to examine their accounts, are given free access to data that can reveal potential fraud. Investors and other individuals don?t have that luxury. But, Mr. Amiram said, they all have the same goals: ?To make capital markets more efficient and make sure bad guys are not cheating anyone.?

Benford?s Law isn?t a magic bullet. It?s only one approach. It isn?t appropriate for all data sets. And when it is a good tool for the job, it simply identifies anomalies in data, which must be explained with further investigation. In many cases, there are reasonable explanations for incongruities.

And with so much attention now paid to Benford?s Law, it might occur to some hucksters to try to evade detection while still cheating. But Mr. Nigrini said it isn?t that simple.

?While you are doing your scheme, you don?t know what the data look like,? he said. ?Because you don?t know what the population looks like while you are committing fraud, it?s?It?s a little tricky to beat Benford?s.?

Accountants Increasingly Use Data Analysis to Catch Fraud - WSJ 1 of 3 http://www.wsj.com/articles/accountants-increasingly-use-data-analysis-t... This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit http://www.djreprints.com. http://www.wsj.com/articles/accountants-increasingly-use-data-analysis-to-catch-fraud-1417804886 Employee fraud costs the country billions of dollars a year. GETTY IMAGES 5/13/2015 2:49 PM Accountants Increasingly Use Data Analysis to Catch Fraud - WSJ 2 of 3 http://www.wsj.com/articles/accountants-increasingly-use-data-analysis-t... RELATED When Using Math to Catch Crooks, You Can't Jump to Conclusions (http://blogs.wsj.comumbers/whenusing-math-to-catch-crooks-you-cant-jump-to-conclusions-1870/) 5/13/2015 2:49 PM Accountants Increasingly Use Data Analysis to Catch Fraud - WSJ 3 of 3 http://www.wsj.com/articles/accountants-increasingly-use-data-analysis-t... Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com. 5/13/2015 2:49 PM Amber Hatten Subject: FW: The Wall Street Journal Accounting Weekly Review From: weeklyreview@wsj.com [mailto:weeklyreview@wsj.com] Sent: Thursday, December 18, 2014 11:54 PM To: Amber Hatten Subject: The Wall Street Journal Accounting Weekly Review Easily Integrate These Wall Street Journal Articles in Your Class Accountants Increasingly Use Data Analysis to Catch Fraud by: Jo Craven McGinty Dec 06, 2014 Click here to view the full article on WSJ.com TOPICS: Forensic Accounting, data analytics, Fraud, Internal Controls, Auditing SUMMARY: Benford's Law is a strong tool to use to detect fraud. The principle states that ones should account for 30% of leading digits, and each successive number should represent a progressively smaller proportion, with nines coming last, at under 5%. Getting the accounting profession to adopt Benford's Law and similar tests has been a slow process. 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. Most people expect digits to occur at about the same frequency. Benford's Law isn't a magic bullet. It's only one approach. It isn't appropriate for all data sets. And when it is a good tool for the job, it simply identifies anomalies in data, which must be explained with further investigation. In many cases, there are reasonable explanations for incongruities. CLASSROOM APPLICATION: This is an excellent forensic accounting concept that can be used by not just fraud examiners, but also accountants and business management to detect fraud. QUESTIONS: 1. (Introductory) What is Benford's Law? What is the principle that makes it valuable? 2. (Advanced) How can Benford's Law be use in accounting and fraud detection? Who can use it? Are some industries or businesses more likely to benefit than others? 3. (Advanced) What are the facts of the example presented in the article? What other internal controls could be used to prevent or detect this kind of fraud? 4. (Advanced) How easy or challenging would it be for a fraudster to circumvent fraud-detection analysis that uses Benford's Law? 5. (Advanced) How could Benford's Law be used successfully in other areas of business than the example offered in the article? Reviewed By: Linda Christiansen, Indiana University Southeast 1