Fraud and funny numbers

I am not a mathematician but a mathematical law is supposed to help spot fraud. Known as Benford's Law, it was referred to in the crime investigation TV series "Numb3rs" in the episode "The Running Man".

Apparently, in many sets of numerical data, the first number is not divided equally among the digits 1-9. The number 1 is expected to be present 11% of the time as the first digit but under Benford's Law, "the first digit is 1 almost one third of the time, and larger digits occur as the leading digit with lower and lower frequency, to the point where 9 as a first digit occurs less than one time in twenty."

This mathematical principle is important in fraud investigations as it may reveal fictitious data eg made-up daily sales figures when in fact no sales have been made. A criminal when creating fictitious sales figures may well try to distribute the first digits evenly about the various numbers but Benford's Law may show suggest that the figures are made up.

For more details about this mathematical law, see http://en.wikipedia.org/wiki/Benford%27s_law

Defamation and auditors 2

Another defence that is sometimes important to investigating auditors of fraud is found in section 8 of the Defamation Act.

Normally, the defence of justification to a defamation lawsuit requires that the defamation is literally true. For example, if the auditor makes the statement that the finance manager of a company stole money ten times from the company, but the manager only stole money 9 times, then the defence of justification would fail.

Under section 8 of the Defamation Act, the defence of justification will still succeed even if certain allegations are untrue provided that considering the rest of the true allegations, the false allegations do not materially injure the other party's reputation. There is probably little difference from the defamatory point of view whether a person stole money 9 times or 10 times, so the defence is likely to succeed.

Defamation and auditors

As mentioned previously, section 208 of the Companies provides auditors with qualified privilege with respect to defamation lawsuits relating to the audit report.

Defamation occurs where a oral or written statement lowers the reputation of a person. The defamation may occur expressly or impliedly. For example, a statement like "the financial manager embezzled the money" is expressly defamatory while the statement "the clerk was in charge of the missing funds" is impliedly defamatory.

At common law, an auditor also has qualified privilege. This privilege is important when fraud investigations are being carried out. Very often, preliminary statements and conclusons implicating certain person or persons will be made by the investigating auditors before all the evidence is available. Such statements could well turn out to be incorrect.

Qualified privilege will protect the auditors for honest mistakes. They must ensure that the statements are made to the correct persons - those who have an interest in receiving the information or have a duty to receive it, for example, statements about the fraud made to the directors of the victim company or to the authorities. However, statements made to the spouse of the suspected criminal will probably not be privileged.