Have you ever been presented with a suspicious looking set of figures, such as a potential customer’s accounts or a disgruntled employee’s expenses claim form, but been unable to prove anything?
A little-known mathematical principle known as Benford’s Law may help.
According to this Law, the first digit in most numbers is more likely to be a 1 than a 2, and 2 more likely than 3 and so on. The leading digit will be 1 about 30% of the time, and 9 only about 5% of the time. It has been found to be true of most real-life data sets, such as electricity bills, house numbers , stock prices, populations, etc. It also applies to business accounts and, in the USA, evidence based on this Law is now admissible in court hearings.
Here is the actual distribution of numbers:
The logic for Benford’s Law is actually quite simple, if not easy to explain (by me, anyway). If you want to know more about the science behind it, have a look at the Wikipedia page.
How can you use Benford’s Law?
The crucial thing is that most fraudsters or others looking to falsify financial documents do not know about Benford’s law. When they make up numbers to go on their loan applications etc., they assume that using random numbers will look most convincing and realistic. This is a mistake.
The next time you come across a dodgy-looking list of numbers, try testing it with this easy Excel tool.
Please post a comment to let me know what results you get from this, and if you can think of other useful applications for Benford’s Law.