Working Paper: NBER ID: w30768
Authors: Jean Ensminger; Jetson Lederluis
Abstract: When organizations have limited accountability, antifraud measures, including auditing, often face barriers due to institutional resistance and practical difficulties on the ground. This is especially true in development aid, where aid organizations face incentives to suppress information about misappropriated funds and may operate with limited transparency. We develop new statistical tests to uncover strategic data manipulation consistent with fraud. These tests help identify falsified expense reports and facilitate monitoring in difficult-to-audit circumstances, relying only on mandated reporting of data. While the digits of naturally occurring data follow the Benford’s Law distribution, humanly-produced data instead reflect behavioral biases and incentives to misreport. Our new tests improve upon existing Benford’s Law tests by being sensitive to the value of digits reported, which distinguishes between intent to defraud and error, and by improving statistical power to allow for finer partitioning of the data. \nWe apply this method to a World Bank development project in Kenya. Our evidence is consistent with higher levels of fraud in harder to monitor sectors and in a Kenyan election year when graft also had political value. The results are validated by qualitative data and a forensic audit conducted by the World Bank. We produce simulations that demonstrate the superiority of our new tests to the standards in the field. Our tests are useful beyond development aid, including for monitoring corporate accounting and government expenditures.
Keywords: fraud detection; development aid; statistical tests; Benford's law; forensic audit
JEL Codes: C49; D73; H83; M42; O22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| new statistical tests (C12) | strategic data manipulation (C69) |
| statistical tests (C12) | levels of suspected fraud (M48) |
| statistical tests (C12) | inflation of expenditures (E31) |
| inflation of expenditures (E31) | misappropriation of World Bank funds (F35) |
| statistical tests (C12) | areas of high fraud risk (M48) |
| qualitative data (C55) | inflation of expenditures (E31) |