From the President

Number-pattern tests, like Benford’s, are still valuable



We’ve all been there in a fraud examination. You’re looking at financial statements, invoice amounts or expense reimbursements that appear normal, but you know in your gut that something is wrong. The numbers just don’t feel right, but it’s not obvious. Like Alice going down a rabbit hole, you’re becoming “curiouser and curiouser” about what you’re inspecting.

Mark Nigrini, Ph.D., a leading Benford’s Law expert, writes the excellent, detailed cover article on six typical number patterns (including Benford’s) that you can search for during your cases to possibly find fraud. Most of us use modern continuous audit techniques and data analytics tools, but it’s valuable to revisit some rock-solid detection methods.

Benford’s Law tells us the distribution of digits in multi-digit natural numbers isn’t random but follows a predictable pattern. Certain digits will show up more than others. For example, you’ll see more 1s than 2s, more 2s than 3s, and so on. Fraudsters either aren’t cognizant of this law and the other number patterns Nigrini covers, or they don’t know how to override them. They often manipulate numbers to try to fly under the radar, but their data alterations always tell a story.

I can recall seeing several illegal payments beginning with “9” or many round numbers in several cases I prosecuted. And I remember procurement fraud cases in which government officials knew the exact authorization limits, but they thought they could avoid detection when they bumped up the amounts.

As Nigrini writes, fraudsters “don’t know when to stop.” They might start small and carefully, but after their initial success they often become brazen and greedy. The numbers and frequencies begin to increase unnaturally, and these established number-pattern tests will catch them. That’s when you can isolate transactions for further review.

The ACFE Report to the Nations demonstrates that organizations with anti-fraud controls discover frauds faster and lose less than their counterparts who don’t. CFEs who are trained in fraud detection techniques, including recognizing number patterns, of course, help organizations reduce their fraud losses.

Unfortunately, in the ACFE’s recent study on the impact of COVID-19, more CFEs are seeing reductions in their anti-fraud budgets. Now isn’t the time to cut controls as financial pressures mount. We can’t let our guard down, especially in a pandemic. We must remain vigilant in reducing the opportunities for fraudsters to thrive.

“All fraudsters think they’re unique,” Nigrini writes. But CFEs can prove fraudsters wrong with number-pattern procedures. Though we depend on high-tech, fraud-detection tools, Nigrini shows us that decades-old discovery methods are still valuable.

Bruce Dorris, J.D., CFE, CPA, is president and CEO of the ACFE. Reach him at: President@ACFE.com.


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