DATA-DRIVEN FRAUD DETECTION

Chapter 6

DATA-DRIVEN FRAUD DETECTION

Short Cases
Case 5

There are a couple of possibilities available to Bucket Corp.:

1. Commercial data-mining software: By running analyses of Bucket’s purchasing trends with the various buyers, it would quickly come to someone’s attention that Harris Lumber has high prices and high-volume purchases. While this could have something to do with the quality of Harris’s lumber, it merits further investigation.

2. Statistical analysis: According to Benford’s Law, a higher percentage of invoice totals should start with number 1 (about 30 percent), followed by number 2 (about 17 percent), and so on. The numbers for Harris Lumber clearly do not follow this trend, while the other three companies do follow this trend much more closely. This is a pretty good indication that the invoices for Harris may not be totally genuine. Bucket should look further to see if there are any abnormal relationships between Harris and Bucket’s purchasing agent.

Case 8

1.

2. Based on a comparison of the sample data with Benford’s Law, there could be a possible fraud problem. A much larger sample is required to be certain that the troublesome patterns are persistent, and additional tests such as querying addresses of vendors or analyzing vendor volumes over the past few months should be undertaken.

Case 10

1. Some areas of concern are the rapid growth of receivables without a corresponding increase in inventory. Adding to this concern is the increase in accounts payable. Normally, as accounts payable increase, inventory should also increase.

2. Possible explanations for these trends exist. The company could have had a change in credit policy, allowing for accounts receivable and accounts payable to increase. Also, the possibility exists that the company has sold or discarded obsolete inventory to reduce the amount it carries on the books.
Case 11

1.

Even though the pattern does not exactly follow a normal Benford’s Law shape, it does not differ much from expectations. The only digit that looks out of the ordinary is “4,” and testing could be performed to determine if that is a problem. Most likely, however, fraud is not occurring and no further investigation is necessary.

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