He's Got Their Number: Scholar Uses Math to Foil Financial Fraud By Lee Berton Some crime busters depend on fingerprints. The O.J. Simpson prosecutors put their faith in DNA. Now one scholar in Nova Scotia has taken cooperation between law enforcement and science a step further. He is using an arcane mathematical law to help governments and companies catch financial frauds. Mark Negrini, an assistant professor of accounting at St. Mary's University in Halifax, is trapping tax cheats, check forgers and embezzlers with an obscure theory known as Benford's Law. Formulated by physicist Frank Benford in 1938, the law lays out the statistical frequency with which the numbers 1 through 9 appear in any set of random numbers. Mr. Negrini applies the law to the numbers on suspicious checks or tax returns. A series of legitimate check amounts or tax write-offs will be genuinely random, while those dreamed up by a human will not. If the numbers on the checks or tax returns do not obey Benford's Law, they can't be random, and "someone is taking the company to the cleaners," Mr. Negrini says. Benford's Law "gives Professor Negrini a tool worthy of Sherlock Holmes," says Robert Burton, chief financial investigator for the district attorney's office in Brooklyn, N.Y. Mr. Burton spotted check fraud at seven companies, which he declined to identify, using a Benford's Law computer program Dr. Negrini sent him last year. He used the program to analyze 784 checks issued by the seven companies and found that check amounts on 103 checks didn't conform to expected patterns. "Bingo, that means fraud," says Mr. Burton. The district attorney has since caught the culprits, some bookkeepers and payroll clerks, and is charging them with theft. Mr. Negrini has also lent his expertise to federal and state tax authorities, officials in Denmark and the Netherlands and to several companies. He has even put President Clinton's tax returns to the Benford's Law test. When he analyzed the president's returns for the past 13 years he found that "the returns by Clinton follow Benford's Law quite closely," a good sign the president is paying his taxes. The program also showed Mr. Clinton rounds off the amounts on his tax returns, according to Mr. Negrini. "It's quite apparent there's a fair amount of estimation," he says. [End] -- +---------------------+--------------------------------------------------+ | ____ ___ | Justin Lister ruf@cs.uow.edu.au | | | \\ /\ __\ | Center for Computer Security Research | | | |) / \_/ / |_ | Dept. Computer Science voice: 61-42-214-327 | | | _ \\ /| _/ | University of Wollongong fax: 61-42-214-329 | | |_/ \/ \_/ |_| (tm) | Computer Security a utopian dream... | | | Disclaimer: dreaming is at own risk | +---------------------+--------------------------------------------------+