Financial Investigation Tools & Techniques

Are there any tools or techniques you would generally recommend for use in financial investigations, e,g. Benford's law or trend analysis?


b.clarke's picture

Techniques    1 thanks

b.clarke | | Permalink

Graphs are good, they cut through the detail. And a trend line put though the data doesn't do any harm. After all, you're aiming to tell a simplified, but professionally supportable, story.

Unless you're a qualified statistician, I wouldn't rely on Benford's Law, because you might have to defend it in the witness box. A quick analysis of the data using the principles of Benford's law might yield some interesting leads for further investigation, but I would never rely on it in writing my report.




davidwinch's picture

What sort of financial investigations?

davidwinch | | Permalink

If you are referring to criminal prosecutions and (proposed) evidence in the Crown Court then I would be extremely cautious about presenting opinion evidence based on, for example, Benford's Law (which is a polite way of saying that I would not myself touch it with the proverbial barge pole).

You might be interested in THIS ARTICLE of mine.


Ok, thanks. Point taken, I

jpcc1 | | Permalink

Ok, thanks. Point taken, I won't place a lot of reliance on Benford's law as courtroom evidence!

But as a tool for identifying possible fraud or errors?

I'm interested in tools or techniques that could be used to review an organisation's accounts and records to indicate whether an area requires investigation.

Currently I'd look at the accounts; previous years' accounts; comparable organisations' accounts; available open-source information about the organisation (to put it into context); possibly bank statements where available. On occasion I might have access to prime records, Nominal Ledger, Purchase Ledger, Sales Ledger etc

I'm wondering if there are other techniques I could use for identifying where things warrant a closer look, or tools for speeding up such analysis.



One quick tool

dougc99 | | Permalink


How about using horizontal and vertical analysis on the financial statements.


It a fairly quick rough and ready method to spot major anomolies which can then be investigated more closely.


Benford's Law    2 thanks

alistair_king | | Permalink

I wouldn't rely on it in court but it does work as a way to identify anomalies you need to investigate. Some anomalies will be down to fraud, some won't. You have to dig further to find out which.

In one case, comparing first numbers in an accounts database to the statistical distribution I would have expected from Benford's law I found a big spike on 3. Turned out we had thousands of small invoices for 3.10 pounds plus VAT for towel laundry. By renegotiating the billing arrangements we saved ourselves a lot of money on the cost of processing invoices.

In another instance, I found a spike on 4. Somebody had signing authority of 5,000 pounds and was making payments for false invoices just below that. People do tend to think in patterns, even when they think they are being random and these patterns do stand out when you apply Benford's law.

Often you can find things by running a query on an accounts database and dumping the result into Excel to play with in a pivot table. For example:

  • Customer accounts where the sales invoices and sales credit notes cancel out (e.g. someone booked a credit note in return for a "commission" from the customer)
  • Sales accounts which have a higher frequency of credit notes than other sales accounts
  • Supplier accounts with more than 12 payments a year (I came across a case where the company processed no supplier credit notes but paid the supplier the statement amount, totalled the credit notes at the end of the quarter, and then gave a cheque to the directors for this amount, recording it in the books as a fourth payment to the supplier)
  • Odd VAT rates (I once saw an invoice with over 1000% VAT)
  • Duplicate invoices (for example if the invoice got delayed on an approver's desk so the AP clerk processed a copy invoice when the supplier demanded payment, then the original turned up)
  • Invoice numbers that don't fit the usual sequence for the supplier (I once had a case where the purchaser has blank invoices in his desk drawer and would issue them for a commission from the supplier)
  • Different values for the same transaction in different companies books (e.g. to create a fictitious loss in a subsidiary)
  • Wrong transaction types - e.g. if someone has been playing games and pushing numbers around in the system by journal to hide some issue. I once found a $70 million (!!) accounting fraud this way where an employee tried to hide his mistake by booking journals to offset the transactions so nothing appeared when you looked at TB level.

Another simple test is to try matching customer or  supplier addresses to employee addresses (found fraudsters this way).

A fraud prevention tool rather than fraud detection - build a map of who has what permissions in the system. Often you will find far too many people with high level permissions that are nothing to do with their actual jobs and prevent effective segregation of duties. Then work out the "should be" condition and get IT to set up the correct roles in the system and assign relevant employees. I've seen FTSE 100 companies where half the people with access to the finance system were allocated "controller" roles.


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