Beruflich Dokumente
Kultur Dokumente
discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/259783068
CITATION READS
1 2,792
5 authors, including:
Some of the authors of this publication are also working on these related projects:
Compliance and Effectiveness Analysis of the Mutual Evaluation Reports of Financial Action Task
Force Member Countries View project
All content following this page was uploaded by Nooraslinda Abdul Aris on 21 January 2014.
The user has requested enhancement of the downloaded file. All in-text references underlined in blue are added to the original document
and are linked to publications on ResearchGate, letting you access and read them immediately.
2013 IEEE Symposium on Humanities, Science and Engineering Research (SHUSER)
AbstractFraud is not a new subject. Fraud basically Discussions on computer-based fraud detection techniques
involves any crime committed by a perpetrator that uses in most accounting circles revolve around the use of Benfords
deception in order to gain something as the element of Law to discover user input or other fraudulent amount in
opportunity, pressure and rationalization exist. Thus, it is corporate databases. Analysis of data against Benfords
important to prevent and detect fraud before it causes the distribution is useful. However, it is one of many computer-
business to collapse. Fraud detection is an evolving based fraud detection techniques used by professionals and
discipline. Statistical methods and data mining are said to researched by academics [4]. Beneish model which is based
be among the best techniques to detect fraud. Computer- on ratio analysis seems to be used in earning manipulation but
rarely discussed and compared with Benfords Law.
based fraud detection revolves the usage of Benfords Law
while Beneish model which is based on ratio analysis can This paper aims to compare the application of Benfords
also be utilised in discovering anomalies and detecting Law and Beneish Model in detecting fraud. Definition, usage
fraud. This paper, therefore, aim to focus on analysing the and process of the two techniques are discuss to shed light of
usage, process and application of Benfords Law and reader and also to provide alternative among researcher and
Beneish Model in detecting accounting fraud. practitioners in developing tools to detect accounting fraud in
Comparisons were made to conclude that both techniques organisations.
appear to have its own benefit in the quest of detecting and The paper is divided into five sections. Section two
preventing fraud occurrence. discusses the evolution of fraud definition, classification,
Keywords-Fraud, data mining, Benfords Law, Beneish Model fraud triangle and statistical data. This is followed by detection
of accounting fraud commonly employed by organisation.
I. INTRODUCTION Section four highlights the application of Benfords Law and
Accounting fraud took centre stage when Enron (2001), data mining as compared to Beneish model and ratio analysis.
WorldCom (2002) and Nortel (2003) reported losses Last section presents the conclusion.
amounting more than USD20 billion. Given the current state II. EVOLUTION OF FRAUD
where no industry is immune to fraudulent situations and the
negative publicity that swirls around them, prevention and A. Fraud and Its Classsification
detection of fraud and abuse has become a major concern of Fraud is deception or misrepresentation that an individual
many organizations. or entity makes that knowing the misrepresentation could result
Fraud detection is a continuously evolving discipline. The in some unauthorized benefit to the individual or to the entity
majority of business transaction data is now formatted or to some other party [5].
electronically. The likelihood is high that most of the data to The term fraud has been described and elaborated in many
be investigated can be accessed electronically. Studies have different ways by scholars and laymen alike, the most
shown that as much as 93% of a modern companys data is simplistic being that fraud is any crime for gain that uses
stored digitally. Paper trail investigative work or manual deception [6]. Although scholars have approached this term in
investigation will be too physically tedious, time-consuming a variety of ways, it has been generally agreed upon that fraud
and the investigator might overlook some relevant data [1]. can be defined ultimately as the intentional act of misleading
Two main strategies for detecting accounting fraud are or committing harm to others with the aim of securing an
auditing and statistics. Statistical fraud detection strategies unfair or unlawful advantage [7-12]. Kranacher [11] has
rely on analytical methods. Some studies pointed that finding further simplified the term as theft by deception.
the source of fraud using statistical method is more efficient As scholars have agreed, fraud involves elements such as
than analysing individual claims [2, 3]. deception [13] and dishonesty [12] normally involved the
Statistics methods and data mining have been applied senior management [9], along with other attributes such as
successfully to detect activities such as money laundering, e- purposeful intent, intensity of desire, risk of apprehension, the
commerce scams, credit card fraud, telecommunications fraud, violation of trust, rationalization, etc [14]. Moreover, unlike an
insurance fraud, and computer intrusion etc. Thus, it may be a error or mistake, fraud is deliberate, intentional, and more often
suitable tool to detect accounting fraud. than not, involves the purposeful concealment of facts [15].
This is interesting to point out because fraud does not perceived pressure or incentive, perceived opportunity, and
necessarily have to be a wilful act, but can take the form of an rationalization [10, 28, 30].
omission [16]. This is supported by Ramamoorti [17] who
classifies fraud as comprising of two types of These model assists individuals and organizations in not
misrepresentation: the suggestion of falsehood or the only detecting fraud, but in preventing it as well. For example,
suppression of truth. in a study conducted by the ACFE [5, 25], it was shown that
the most common red flags by perpetrators were: living beyond
Most scholars have agreed that the main aim of fraud is the their means (43%), experiencing financial difficulties (36%),
advantage or benefit the perpetrator would gain in the end. excessive control issues in relation to their job (23%), and an
KPMG [18], on the other hand asserted that the perpetrator unusually close association with their vendors or customers
need not necessarily benefit from his/her deceit. Nevertheless, (22%). With this knowledge, people are more aware of these
what all scholars have shown to agree upon however, is that tell-tale signs of fraud, and thus may help in preventing a loss
fraud includes trickery, cunning and unfair means by which the from occurring.
victim is cheated [7], and can also be committed through a
variety of different ways, such as through mail, wire, phone, C. Fraud Statistics
and the internet [19]. Fraud can threaten the stability of a business by resulting in
some significant financial losses. ACFE [25] reported that the
Scholars have classified accounting fraud in many different
ways. Albrecht [7], for example, offers two types of typical business will lose on average 5% of revenue to fraud
classification; fraud committed against an organization each year. This figure translates to a potential projected annual
(occupational fraud), and fraud committed on behalf of an fraud loss of more than USD3.5 trillion using the 2011 Gross
organization (fraudulent financial statement). Whereas Viton World Product. As mentioned earlier, there are three types of
[20] categorizes fraud into three: management fraud, fraud. The statistics below showed that the most alarming
occupational or transactional fraud, and corruption. fraud in terms of frequency is asset misappropriation.
Nonetheless, most scholars agree that there are fundamentally However, the median losses are highly contributed by the
three types of fraud: corruption, asset misappropriation, and fraudulent financial reporting [25].
fraudulent financial reporting [5, 10-12, 21-23]. Table 1: Frequency and Median Loss of Fraud by Types
727
2013 IEEE Symposium on Humanities, Science and Engineering Research (SHUSER)
728
2013 IEEE Symposium on Humanities, Science and Engineering Research (SHUSER)
freedom, it is possible to assign a probability that any M = -4.84 + 0.92*DSRI + 0.528*GMI + 0.404*AQI + 0.892*SGI +
variation between actual and observed is due to chance alone. 0.115*DEPI 0.172*SGAI + 4.679*TATA 0.327*LVGI
The higher the Chi Square, the less likely that any difference Table 2: Eight ratio analyses used as the Beneish variables
can be explained by chance alone.
Ratio Formula
Output from the processing will include measures of Sales Growth Index Sales current year
Benfords compliance using D-statistic. D-Statistics is a test (SGI) Sales prior year
Gross Margin Index (Sales prior year Cost of goods sold prior year) /
that relies on the fact that the value of the sample cumulative (GMI) Sales prior year
density function is asymptotically normally distributed. For D- (Sales current year Cost of goods sold current
statistics test, values in excess of 0.10 indicate that the year) / Sales current year
observed distribution differs significantly from the expected Asset Quality Index Current assets + Property, plant and equipment
and do not follow Benfords Law. (AQI) Total assets
Days Sales in Receivables current year / sales current year
Authors [37, 38, 39, 40, 41] have identified several steps in Receivable Index Receivables prior year / sales prior year
Benfords Law to detect fraud in accounting data. We have (DSRI)
simplified the process into five steps as illustrate in fig. 1. Sales, General and Sales, general and administrative expenses current
Administrative year/ sales current year
Expenses Index Sales, general and administrative expenses prior
(SGAI) year/ sales prior year
Depreciation Index Depreciation current year/ Depreciation + PPE
(DEPI) current year
Depreciation prior year/ Depreciation + PPE prior
year
Leverage Index Long term debt + Current liabilities current year /
(LVGI) Total assets current year
Long term debt + Current liabilities prior year /
Total assets prior year
Total accrual to total ( Current Asset - Current Liabilities - Short-
assets (TATA)
term Debt Depreciation & Amortisation - Deferred
tax on Earnings - Equity in Earnings)
Total assets
729
2013 IEEE Symposium on Humanities, Science and Engineering Research (SHUSER)
Fig. 2 illustrates five main steps that can be used to detect exercised when using using financial
fraud or earning manipulation in the companys financial data. Benfords law as not all information for
non-conforming data publicly traded
are necessarily companies, and as
fraudulent. such, cannot be reliably
Certain types of fraud used to study privately-
cannot be found with held firms.
this analysis. The earnings
Some populations of manipulation in the
accounting-related data sample involves
do not conform to a earnings overstatement.
Benfords distribution. May not be reliable to
study firms operating
in circumstances
conducive to
decreasing earnings.
V. CONCLUSION
Fig. 2: Five step of Beneish Model in detecting fraud Accounting fraud is a serious threat to any firms, small or
big as no one is immune from it. The opportunity to engage in
Clearly, both techniques can be used to detect fraud in fraud increases as the firms control structure is week;
accounting data. It provides future researchers alternative ineffective corporate governance and quality of audit function
techniques for fraud detection thus assist in mitigating the deteriorate. As highlighted above, although fraudulent
financial losses. To summarize our finding, table 3 below financial reporting reported relatively low percentage of cases
conclude and compare Benfords Law and Beneish Model. but the median losses are huge. The fact that fraud is costly
Table 3: Comparison between Benfords Law and Beneish Model and the prevention may also be so, understanding how to
prevent and detect accounting fraud is a must.
Benfords Law Beneish Model
Definition Advanced digital analysis A mathematical model that Audit and statistical techniques are said to provide the
technique that involves uses eight financial ratios to means of detecting fraud. These audit and statistical
examining the actual detect whether an entity has
frequency of the digits in the manipulated its earnings. techniques for fraud detection especially using accounting data
data. or financial statements are crucial for organisation. Audit
How Begin with measuring Create an M-Score which is involves an examination of fairness, and transparency
deviation - Chi Square test. based on a combination of presentation of financial statement to the stakeholders. It is
Then output is tested using eight different variables.
D-statistic. common to have internal auditor to review the organisation
Usage and Commonly used in Commonly used to detect books on a periodic basis in order to prevent fraud from
application identifying fraud in insurance earnings manipulation in occurring. On top of that, external auditors review is seen to
claims, corporate Income tax, various organisations as long be worth and beneficial for the business.
employee expense reports, two years financial data is
vendor invoices, accounts available. Statistical techniques had grown in term of acceptance
receivable, accounts payable
and also fixed asset records. among the users in identifying anomalies or red flags. Data
Advantages Powerful analytical tool Considers variables mining is one of the tools in detecting fraud with the
for testing irregularities related to both the application of Benfords Law. Beneish Model on contrary
in data. detection and focus on the application of ratio analysis using at least two sets
The tests are incentives for fraud.
of accounting records. Having these two techniques
straightforward and Allows user to assess
easily implemented on the different aspects of Benfords Law and Beneish model will allow user of
spread sheets without a firms performance accounting data and assist auditor and investigator in finding
any additional software. simultaneously instead anomalies which can be translated into fraud occurrences. By
Computers can easily be of in isolation. applying the right techniques, the accuracy of financial
programmed to include Exploratory power for
a Benfords law fraud. statement could be reinforces and upholds the organisations
component, to test for Widespread acceptance reputation.
the quality of different and used in the
queries and corporate, academic ACKNOWLEDGMENT
enumerators. and institutional world.
Most accounting-related Thus reasonable to The team would like to express their gratitude to
data can be expected to presume that the results Accounting Research Institute (ARI), Universiti Teknologi
conform to a Benfords are accurate and up-to- MARA (UiTM) for providing the financial means and
distribution. date. facilities. This article would not have been possible without the
Cost-effective as it
requires at least two support of the grant provider, family members, and friends.
years data.
Disadvanta Can only be applied to Study based on out-
REFERENCES
ges data that are distributed dated data. [1] Syed Zakaria, S. N. A. & Syed Ahmad, S. N (2009). Digital Forensic
across multiple orders of Has large rate of Accounting: Analytical Procedures Using Audit Commander
magnitude. classification errors. (unpublished). ICFC 2009 (unpublished).
Caution must be The model is estimated
730
2013 IEEE Symposium on Humanities, Science and Engineering Research (SHUSER)
[2] Ortega P.A., Figueroa C.J. & Ruz GA (2006) A medical claim [28] Salehi, M. & Azary, Z. (2008). Fraud Detection and Audit Expectation
fraud/abuse detection system based on data mining: a case study in Gap: Empirical Evidence from Iranian Bankers. International Journal of
Chile. In Proceedings of International Conference on Data Mining, Las Business and Management, Vol. 3, No. 10, pp. 66-77.
Vegas, Nevada, USA [29] Albrecht, W. S. (1996). Employee Fraud, Internal Auditor, October, p:
[3] Yang, W.S. & Hwang, S.Y. (2006): A process-mining framework for 26.
the detection of healthcare fraud and abuse, Information and Security, [30] Albrecht, W. A. (2011). Forensic Examination. 4th Edition. Mason OH
vol. 18: 48-63. USA: South-Western Cengage Learning.
[4] Alexander, D. (n.d.). Data Mining. Retrieved 07 24, 2012, from The [31] Ramos, M. (2003). Auditor's Responsibility for Fraud Detection.
University of Texas at Austin: http://www.laits.utexas. Journal of Accountancy , 28-35.
edu/~norman/BUS.FOR/course.mat/Alex/
[32] Adrian, N. K., Lawrence, A. & Cristal, L. A. S. (2009). Forensic
[5] ACFE. (2010). Reports to the Nations on Occupational Fraud and Accounting: public Acceptance towards Occurance of Fraud Detection.
abuse. Association of Certified Fraud Examiners. International Journal of Business and Management, Vol. 4, No. 11, pp.
[6] Wells, J. (2011). Corporate Fraud Handbook- Prevention and 145-149.
Detection. 3rd Edition. Hoboken: NJ.: John Wiley & Sons. [33] Seifert, J. W. (2004). Data Mining: An Overview. Washington, D.C.:
[7] Albrecht, W. A. (2004). Fraud Examination and Prevention. Mason, Congressional Research Service.
OH: South- Western. [34] King, E. A. (2008). How to Buy Data Mining: A Framework for
[8] Hopwood, W. L. (2008). Forensic Accounting. New York: NY: The Avoiding Costly Project Pitfalls in Predictive Analytics. New York:
McGraw-Hill Companies, Inc. DMReview Volume 15, Number 10.
[9] Adrian, N. K., Lawrence, A. & Cristal, L. A. S. (2009). Forensic [35] Palace, B. (1996). Data Mining: What is Data Mining? Retrieved 07 24,
Accounting: public Acceptance towards Occurance of Fraud Detection. 2012, from UCLA Anderson School of Management:
International Journal of Business and Management, Vol. 4, No. 11, pp. http://www.anderson.ucla.edu/faculty/jason.frand/teacher/technologies
145-149. /palace/datamining.htm
[10] Rezaee, Z. R. (2010). Financial Statement Fraud- Prevention and [36] Cleary, R. and Thibodeau, J. C. (2005). Applying Digital Analysis Using
Detection. 2nd Edition. Hoboken: NJ: John Wiley & Sons. Benfords Law to Detect Fraud: The Danger of Type 1 Errors, Auditing:
[11] Kranacher, M.-J. (2010). Chapter 3: Who Commits Fraud and Why: A journal of Practice & Theory, Vol 24(1), pp. 77-81.
Criminology and Ethics. In M.-J. Kranacher, R. Riley, & J. T. Wells, [37] Simkin, M. G. (2010). Using Spreadsheets and Benford's Law to Test
Forensic Accounting and Fraud Examination (pp. 58-85). Hoboken: Accounting Data. ISACA Journal, Vol. 1 , 47-51.
John Wiley & Sons, Inc. [38] Diekmann, A. (2007). Not the First Digit! Using Benfords Law to
[12] Singh, S. (2011). The Common Types of Fraud, It's Causes and Impact Detect Fraudulent Scientific Data, Journal of Applied Statistics, Vol.
to a Public Sector Organization. National Public Sector Accountants 34(3), pp. 321329.
Conference (pp. 1-30). Kuching: KPMG Malaysia. [39] Gob, R. (2007). Data Conformance Testing by Digital AnalysisA
[13] Duffield, G., & Grabosky, P. (2001). The Psychology of Fraud. Critical Review and an Approach to More Appropriate Testing, Quality
Canberra: Australian Institute of Criminology. Engineering (19), pp. 281297.
[14] Ramamoorti, S., & Olsen, W. (2007). Fraud: The Human Factor. [40] Panigrahi, P. K. (2006). Discovering Fraud in Forensic Accounting
Financial Executive, pp. 53-55. Using Data Mining Techniques, The Chartered Accountant, April 2006,
[15] Administrative Leadership Academy, UISD. (2011). Fraud and Ethics pp. 1426-1430.
Compliance. Laredo, Texas, USA. [41] Reddy, Y.V and Sebastian, A. (2012). The IUP Journal of Accounting
[16] Turner, K. F. (2009). The Ethics of Fraud. Lubbock: Texas Tech Research & Audit Practices, Vol. XI, No. 3, 2012
University System. [42] Brickell, D. (2011). The Beneish M-Score: Identifying Earnings
[17] Ramamoorti, S. (2008). The Psychology and Sociology of Fraud: Manipulations and Short Candidates. Retrieved 08 03, 2012, from
Integrating the Behavioral Sciences Component Into Fraud and Forensic iStockAnalyst: http://www.istockanalyst.com/finance/story/5179574/the
Accounting Curricula. Issues in Accounting Education, Vol. 23, No. 4 , -beneish-m-score-identifying-earnings-manipulation-and-short-
521-533 candidates
[18] KPMG. (2011). The Common Types of Fraud, Its Causes and Impact to [43] Wiedman, C. I. (1999). Instructional Case: Detecting Earning
a Public Sector Organization. 1-30. Manipulation, Accounting Education February 1999, Vol 14 (1), pp.
[19] Wikipedia contributors. (2012). Fraud. Retrieved 06 06, 2012, from 145-176.
Wikipedia, The Free Encyclopedia: http://en.wikipedia. [44] Harrington, C. (2005), Analysis ratios for detecting financial statement
org/w/index.php?title=Special:Cite&page =Fraud&id=496271427 fraud, Fraud Magazine March/April 2005.
[20] Viton, P. L. (2003). Creating Fraud Awareness. SAM Advanced
Management Journal. [45] Investopedia. (2012). Beneish Model. Retrieved 08 02, 2012, from
Investopedia: http://www.investopedia.com/terms/b/beneishmodel.
[21] AICPA. (2006). Appendix to SAS No. 99, Fraud Risk Factors. asp#axzz22k3FouDo
[22] Murphy, P. D. (2011). Psychological Pathway to Fraud: Understanding
and preventing Fraud in Organization. Journal of Business Ethics , 601- [46] Beneish, M.D and Nichols, D.C. (2009), Identifying Overvalued Equity,
618. Johnson School Research Paper Series No. #09-09.
[23] Saksena, P. (2012). Ethical Theories and the Incidence of the [47] Beneish, M.D. (1999). The Detection of Earning Manipulation,
Occupational Fraud. Advances in Management Vol.5(1) , 55-58. Financial Analyst Journal 55, pp.24-36.
[24] Long, L. M. (2009). Internal Controls for Small Businesses to Reduce [48] Beneish, M. D., Lee, C. M.C and Nichols D. C. (2011). To Catch a
the Risk Fraud. Texas: Intuit Inc. Theif: Can forensic accounting help predict stock returns? Also available
[25] ACFE. (2012). Report to the Nation on Occupational Fraud and Abuse: at http://ssrn.com/abstract=1903593
2012 Global Fraud Study. Austin: Association of Certified Fraud
Examiners.
[26] Duffield, G., & Grabosky, P. (2001). The Psychology of Fraud.
Canberra: Australian Institute of Criminology.
[27] Wells, J. (2008). Principles of Fraud Examination. 2nd Edition.
Hoboken:NJ: John Wiley & Sons, Inc.