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Check Register Cross-Walk with A/P File

 

Our unique, proprietary method of searching for stolen checks involves electronically scrubbing your check register file for check numbers, dates, payees, and amounts.  Once identified, we merge this information with your Accounts Payable file to identify checks not recorded in the A/P file.  This is a proven way to identify not only stolen checks but checks paid twice inadvertently (perhaps one manual check and one electronic payment).  

 

 Benford’s Law

What is it?

Benford’s Law (which was first mentioned in 1881 by the astronomer Simon Newcomb) states that if we randomly select a number from a table of physical constants or statistical data, the probability that the first digit will be a “1″ is about 0.301, rather than 0.1 as we might expect if all digits were equally likely. In general, the “law” says that the probability of the first digit being a “d” is

          P{d} = 1n(1+1/d) / 1n(10)

 

This implies that a number in a table of physical constants is more likely to begin with a smaller digit than a larger digit. It was published by Newcomb in a paper entitled “Note on the Frequency of Use of the Different Digits in Natural Numbers”, which appeared in The American Journal of Mathematics (1881) 4, 39-40. It was re-discovered by Benford in 1938, and he published an article called “The Law of Anomalous Numbers” in Proc. Amer. Phil. Soc 78, pp 551-72.

Source:  http://www.mathpages.com/home/kmath302/kmath302.htm

How is it used to identify fraud? 

 If we know the normal frequency of digits, then we can identify digit frequencies that violate that normal behavior.  For example, Benford concluded that, out of a group of numbers, the first digit will be “1” about 30% of the time.  By the same law, we would also expect the first digit to be “8” about 5.1% of the time.  If we review Accounts Payable invoices and determine the first digit of the invoices is “8” 50% of the time, then we may have either many legitimate payments that start with “8”; or we may have fictitious invoice amounts.  Fraudsters will often create an amount that starts with a higher number, like 8 or 9, not knowing that auditors are now equipped to identify these abnormal payments. 

Our in-house algorithms identify vendors with payments that consistently violate Benford’s Law of Numbers.  If their digit frequency distribution varies widely from the below graph, the vendor is flagged for further investigation. 

 

Rounded-Amount Invoices

People who commit fraud often create invoices with rounded amounts, which are invoices without pennies.  Our proprietary software identifies these invoices and ranks them by the vendors who have the highest percentage of rounded amount invoices.  For example, a vendor having 100% of their invoices without pennies would appear first on the list.

Vendors Consistently Paid Quickly

Vendors who are consistently paid quickly may be suspect of an unusual, or fraudulent, agreement involving kickbacks.  Our in-house software calculates the difference between the invoice date and check date, and ranks vendors who are consistently paid in 10 days or less.  Vendors with the greatest percentage of quickly-paid invoices are listed first on the alert list.

Sequentially-Numbered Invoices

Sometimes you run across vendors who have sequentially-numbered invoices such as “0001”, “0002”, “0003”, which may be legitimate.  However, if this pattern is stretched over time, it may suggest that this vendor only does business with you, which is extremely rare in the business world.  Although the vendors appearing on this alert list may be legitimate, some may be worth investigating further.

Invoices Just Below Approval Amounts

Inside fraudsters often know the Accounts Payable manager approval amounts and may sometimes submit a fraudulent invoice that falls just below an approval amount.  (For example, $2,999 may be a fraudulent invoice falling just below the $3,000 approval level).

Our proprietary algorithms identify invoices that fall up to 3% below the approval amount. Then, vendors are ranked according to their percentage of invoices falling just below the approval amount.

Vendors with a Rapid Invoice Volume Increase

The in-house accounts payable fraud detector identifies vendors who have a rapid increase in invoice volume.  The increase may be legitimate, but also may warrant further investigation.  Suppose a vendor has 2 invoices one month and 70 the next – you may want to know why even if the reason is not a fraudulent one.  The algorithm detects only consecutive-month changes in the number of invoices.  If the percentage increase is 250% or greater, then the vendor is flagged and put on the alert list.  This would include a jump from 5 invoices to 13, which is not particularly interesting, but will also catch an invoice jump from 50 to 126, which may be more interesting.

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