The Use of Machine Learning to Detect Financial Transaction Fraud: Multiple Benford Law Model for Auditors

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November 1, 2023

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Background: Fraud in financial transaction is at the root of corruption issues recorded in organization. Detecting fraud practices has become increasingly complex and challenging. As a result, auditors require precise analytical tools for fraud detection. Grouping financial transaction data using K-Means Clustering algorithm can enhance the efficiency of applying Benford Law for optimal fraud detection.

Objective: This study aimed to introduce Multiple Benford Law Model for the analysis of data to show potential concealed fraud in the audited organization financial transaction. The data was categorized into low, medium, and high transaction values using K-Means Clustering algorithm. Subsequently, it was reanalyzed through Multiple Benford Law Model in a specialized fraud analysis tool.

Methods: In this study, the experimental procedures of Multiple Benford Law Model designed for public sector organizations were applied. The analysis of suspected fraud generated by the toolkit was compared with the actual conditions reported in audit report. The financial transaction dataset was prepared and grouped into three distinct clusters using the Euclidean distance equation. Data in these clusters was analyzed using Benford Law, comparing the frequency of the first digit’s occurrence to the expected frequency based on Benford Law. Significant deviations exceeding ±5% were considered potential areas for further scrutiny in audit. Furthermore, the analysis were validated by cross-referencing the result with the findings presented in the authorized audit organization report.

Results: Multiple Benford Law Model developed was incorporated into an audit toolkit to automated calculations based on Benford Law. Furthermore, the datasets were categorized using K-Means Clustering algorithm into three clusters representing low, medium, and high-value transaction data. Results from the application of Benford Law showed a 40.00% potential for fraud detection. However, when using Multiple Benford Law Model and dividing the data into three clusters, fraud detection accuracy increased to 93.33%. The comparative results in audit report indicated a 75.00% consistency with the actual events or facts discovered.

Conclusion: The use of Multiple Benford Law Model in audit toolkit substantially improved the accuracy of detecting potential fraud in financial transaction. Validation through audit report showed the conformity between the identified fraud practices and the detected financial transaction.

Keywords: Fraud Detection, Benford’s Law, K-Means Clustering, Audit Toolkit, Fraudulent Practices.