Using Benford’s law and neural networks as a review procedure

Abstract

Introduces a new analytical review procedure that measures the degree to which a data set’s digit distribution deviates from a Benford digit distribution. This deviation can indicate potential manipulation and can be used to signal the need for further audit testing. An artificial neural network is used to distinguish between “normal” and “manipulated” financial data. The results show that if data have been contaminated (at a 10 per cent level or more) a Benford analytical review procedure will detect this 68 per cent of the time. If the data are not contaminated, the test will indicate that the data are “clean” 67 per cent of the time. Because analytical review procedures are not used in isolation, these results probably understate the effectiveness and potential of a digits‐based analytical review procedure. This procedure’s fraud detection results compare favorably to traditional analytical review procedures. Importantly, its unique analysis procedure allows it to complement traditional analytical review procedures. A key limitation of this study is that it uses simulated data, rather than actual data. Such an enhancement will be a critical step in future research. This method appears to have potential merit and provides many opportunities for new research.

An ANN-based auditor decision support system using Benford's law

“…Busta and Weinberg (hereafter B&W) assumed that any concocted data will resemble the Hill distribution because the underlying cognitive generating process would be similar [3]. We agree with this and like B&W, have used the Hill numbers in our work.…”

“…Hill numbers respectively [3]: Table 1 about here Table 2 about here 3 ANN-based binary decision support system for ARP A binary data classification system is designed to signal which one of two pre-specified groups a data point belongs to. The two groups in our system are coded as "Benford" (0) and "non-Benford"…”

Benford’s Distribution in Extrasolar World: Do the Exoplanets Follow Benford’s Distribution?

“…For example, it's presence and applicability have been investigated in various domains, like astrophysics [6,7], geography [8], biology [9][10][11], seismography [12], stock market and accounting [13,14]. Interestingly, violation of Benford's law has been found to be capable of detecting cases of tax fraud [15] and election fraud [16], and it's routinely used by accounting professionals to detect financial irregularities.…”

The Usefulness Of Analytical Procedures, Other Than Ratio And Trend Analysis, For Auditor Decisions

“…Ratios are typically used to disclose relationships and provide expressive comparisons (Business Dictionary, 2015). Ratio analysis is defined as the systematic use of ratios to determine the strengths and weaknesses, as well as the historic and current financial condition of a company (Sahu & Charan, 2013).…”