So could the frauds mentioned here, and no doubt others, have been spotted long before? The answer is yes. And with the astronomical computing power available today, it would not be very hard for auditors or regulators to apply Benford.
So why isn’t it done?
One of the main reasons is probably that… nobody gives a damn.
The many investigations into Madoff showed that the SEC had been warned well before the revelations. More broadly, all you had to do was look at the chart I made above… which was one of Madoff’s sales pitches, to see the problem. Same for Greece’s accounts, which every expert knew were wrong. There is a degree of complacency towards fraud. Because people want to believe. Because it’s convenient. Because going against it takes a lot of energy.
Which obviously leads to the second problem: Benford is a tool, not a court. If the rule flags inconsistencies, it’s a safe bet there has been fraud. But you can’t stop there like a twit thrilled to have been diagnosed ASD-ADHD-gifted-turbodiesel: once you have the diagnosis, you need a procedure to deal with it. And in this case, Madoff means 3 years of investigation. Time during which the fraud can carry on, since you obviously don’t convict someone on the strength of 2 inconsistent curves.
And then there is, of course, what Benford cannot prove: a fraud designed… by someone who knows Benford’s law. So, dear regulators and auditors, next time something smells fishy but the numbers are consistent with Benford, ask yourselves whether the people you are auditing subscribe to Zero Bullshit!
My name is Benjamin Charles, and I advise finance, real estate and web3 companies on branding, positioning and content creation.
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