<b>Benford's Law</b>
 

Linda Hoffman, publisher

Benford's Law

  • December 15 2014

Fraud has long been a concern at multifamily properties that take cash or other methods of cash-equivalent funds for rent and other services. Today employee fraud costs business owners $300 billion a year and much of accounting forensics is like closing the barn door after the horses are out. What's a property to do?

Benford's Law may be just the canary in the coalmine that our properties need.

Using simple data analytics, Benford's Law does nothing more than count the numbers in a property's transactions. The "first-digit theory" tallies the number of ones, twos, threes, etc. at the beginning of each transaction and charts them on a bell curve. Simple math. Big potential.

Such a method would be a fast, easy and a cost efficient way to find anomalies thatsignal fraud and save owners from loss. And it may be as simple as too many 4s.

Tom Hedley, a fraud expert at KPMG, recently recounted a story to the Wall Street Journal where he was called into a call center that suspected its operators were giving out fraudulent refunds. He ran the Benford Law on the books: Hedley and his team stripped off and counted the first digit of the refunds being given and found too many 4s in the count. This led to a deeper probe, but served as a bellwether and provided a trail to the corporate thieves. Eventually the accountants identified the operators who had issued fraudulent refunds and the problem was solved.

What could the Benford Law do for multifamily properties?

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