Benford's Law uncovers earnings management. When physicist Frank Benford tested the first digits in lists of numbers during the 1920s and 1930s, he found that about 31% of the numbers had 1 as the first digit, 19% had 2 , and only 5% had 9 .
I s it possible to tell that a number is wrong just by looking at it? In some cases, you bet. Using Benford's law—a mathematical phenomenon that provides a unique method of data analysis—CPAs can spot irregularities indicating possible error, fraud, manipulative bias or processing inefficiency. Benford's law is used to determine the normal level of number duplication in data sets, which in turn makes it possible to identify abnormal digit and number occurrence. Accountants and auditors have begun to apply Benford's law to corporate data to discover number-pattern anomalies. Frank Benford made a simple observation while working as a physicist at the GE Research Laboratories in Schenectady, New York, in the 1920s.
Exhibit1: Benford's Law—Expected Digital Frequencies Mutual fund math. FAILSAFE CPA - Forensic Accounting, Litigation Support and Fraud Investigation. Jules Kroll Tries His Hand at Credit Ratings. Michael Falco for The New York Times Jules and Jeremy Kroll in their Manhattan offices.
Jules says of big ratings agencies, “They never really looked under the covers, which is what I have done all my life.” Fortunes plundered, ransoms paid, deals cut — the uncovering of such secrets, and the million smaller confidences that are his history, have made Mr. Kroll a rich man. It was nearly 40 years ago, when he practically invented the business known as corporate intelligence, that he first came to the attention of crafty boardrooms. Which is why his latest venture seems at once so unusual and yet so very Kroll.
Yes, credit ratings: gilt-edged triple-A’s, middling double-B’s, ignominious D’s. Ratings agencies, to many, seem like Wall Street’s enablers. Mr. “They never really looked under the covers, which is what I have done all my life,” Mr. THE pertinent question for Mr. Wall Street types tend to look askance at credit ratings no matter who is providing them. Some wonder if Mr. Mr. Ex-con now walks a financial tightrope. The latest business plan at the lofty-sounding Fraud Discovery Institute seems invincible: Gather negative information about a company, place a bet that the price will decline by selling its stock short, and then publish the negative information online.
When the stock price plummets, you cash in. Implemented by Barry Minkow, a former con man who pulled off one of the best-known stock market scams of the 1980s, the plan appears to be working wonderfully - Minkow says he's turning six-figure profits on his trades. And while the strategy makes ethicists gasp and infuriates the companies that are its target, it appears to be legal. Minkow offers no apologies. One federal lawsuit brought by a company his group investigated was dropped when he agreed to stop investigating and trading in the company. "Everybody's in it for money," Minkow said in a telephone interview. "I think people look at this and say, 'Wow, your past is your past,' " said Minkow. Barry Minkow to plead guilty to insider trading - latimes.com. Barry Minkow, a 1980s teen tycoon from Reseda whose ZZZZ Best carpet-cleaning firm turned out to be a Ponzi scheme, resigned as minister at a San Diego County church and intends to plead guilty to a charge of insider trading, according his attorney.
The charge stems from a federal investigation in Florida involving a business, the Fraud Discovery Institute, that Minkow set up while guiding Community Bible Church in Mira Mesa. His idea was to reveal corporate fraud while holding short positions in the companies he exposed, allowing him to profit on declines in stock prices. One of his online attacks, a January 2009 diatribe against Lennar Corp., drove Lennar's stock down 20%. It also led the Miami home builder to sue Minkow for libel and extortion; and a judge ordered Minkow to pay millions of dollars in sanctions. SEC fights for funding on Capitol Hill - Mar. 10. By Jennifer Liberto, senior writerMarch 10, 2011: 2:41 PM ET WASHINGTON (CNNMoney.com) -- The head of the Securities and Exchange Commission warned Congress on Thursday that proposed cuts to the regulator's budget would hurt its ability to do its job watching markets.
Mary Schapiro and her staff were slated to spend all day on Capitol Hill to help the agency get the funding it says it needs to prevent things such as the Bernard Madoff investor fraud and the May 6 flash crash, when the Dow tumbled by nearly 1,000 points and then recovered most of the loss. She also will talk about the need for resources to carry out the new Dodd-Frank laws cracking down on Wall Street firms that caused the financial crisis. "A vigorous examination program not only reduces the opportunities for wrongdoing and fraud, but also provides early warning about emerging trends and potential weaknesses in compliance programs," Schapiro said in testimony before the Senate Banking Committee.
Sen. Share this. Whistleblowers Will Benefit From Rules Under Dodd-Frank.