Abstract
Recently, one of the major Romanian insurers was declared insolvent by the market regulator as it was discovered to have fraudulently reported its financial statements. The impact on the insurance prices on the Romanian market was impressive. Significant funds were made available by the Romanian Government to stabilize the market and prevent linked bankruptcies. Over the years, the company was audited by reputable auditors, and yet nothing transpired about the massive fraud, although visible signs of trouble were not difficult to spot for the insurance company. As distressed businesses have stronger inducements to disguise their financial difficulties, they are more likely to manipulate their financials. After years of doubts, it was finally clear that the company manipulated its provisions and the available reserves. Benford’s Law is an easy tool that signalizes possible manipulation of data, and it was used frequently to detect manipulation in financial reports. As such, we used Benford’s Law to determine if the financial statements reported by the insurance company appeared to have been artificially manipulated. The results obtained from this investigation can be largely extrapolated to research related to other types of fraud in different industries.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
References
Alderman, L., Schuetze, C.Z.F.: In a German Tech Giant’s Fall, Charges of Lies, Spies and Missing Billions. The New York Times, 26 June 2020, Available at: https://www.nytimes.com/2020/06/26/business/wirecard-collapse-markus-braun.html
Amiram, D., Bozanic, Z., Rouen, E.: Financial statement errors: evidence from the distributional properties of financial statement numbers. Rev. Account Stud 20, 1540–1593 (2015)
Ball, R.: Market and political/regulatory perspectives on the recent accounting scandals. J. Account. Res. 47(2), 277–323 (2009)
Barney, B., Schulzke, K.: Moderating ‘“cry wolf”’ events with excess MAD on Benford’s Law research and practice. J. Forensic Account. Res. 1(1), A66–A90 (2016). https://doi.org/10.2308/jfar-51622
Cleary, R., Thibodeau, J. C.: Applying digital analysis using Benford’s law to detect fraud: the dangers of type I errors. Auditing: J. Pract. Theory 24(1), 77–81 (2005)
Demir, B., Javorcik, B.: Trade policy changes, tax evasion and Benford’s Law. J. Develop. Econ. 144 (2020)
Diekmann, A., Jann, B.: Benford’s law and fraud detection: facts and legends. German Econ. Rev. 11(3), 397–401 (2010)
Drake, P., Nigrini, M.: Computer assisted analytical procedures using Benford’s Law. J. Account. Educ. 18, 127–146 (2000)
Druică, E., Oancea, B., Vâlsan, C.: Benford’s law and the limits of digit analysis. Int. J. Account. Inf. Syst. https://doi.org/10.1016/j.accinf.2018.09.004 (2018)
Durtschi, C., Hillison, W., Pacini, C.: The effective use of Benford’s Law to assist in detecting fraud in accounting data. J. Forensic Account. 5(1), 17–34 (2004)
Gabbioneta, C., Greenwood, R., Mazzola, P., Minoja, M.: The influence of the institutional context on corporate illegality. Acc. Organ. Soc. 38(6–7), 484–504 (2013)
Grammatikos, T., Papanikolaou, N.I.: Applying Benford’s Law to detect accounting data manipulation in the banking industry. J. Financial Serv. Res. 59(1), 115–142 (2021)
Herteliu, C., Jianu, I., Dragan, I.M., Apostu, S., Luchian, I.: Testing Benford’s Laws (non) conformity within disclosed companies’ financial statements among hospitality industry in Romania. Phys. A Stat. Mech. Its Appl. 582 (2021)
Hill, T.P.: A statistical derivation of significant digit Law. Stat. Sci. 10, 354–363 (1995)
Istrate, C.: Detecting earnings management using Benford’s Law: the case of Romanian listed companies. J. Account. Manag. Inf. Syst. 2019(18), 198–223 (2019)
Jianu, I., Jianu, I.: Reliability of Financial Information from the Perspective of Benford’s Law. Entropy 23(5), 557 (2021)
Kelly, J.: Fraud Allegations Rock Tech Company Wirecard—Billionaire CEO Earned Millions. 22 June 2020, Forbes, available at https://www.forbes.com/sites/jackkelly/2020/06/22/fraud-allegations-rock-tech-company-wirecard-billionaire-ceo-earned-millions/?sh=442e148413ff
Kolias, P.: Applying Benford’s Law to COVID-19 data: the case of the European Union. J. Public Health (2022)
Kossovsky, A.E.: On the mistaken use of the chi-square test in Benford’s Law. Stats 4(2), 419–453 (2021)
Mir, T.A., Ausloos, M.: Benford’s Laws: a sleeping beauty sleeping in the dirty pages of logarithmic tables. J. Assoc. Inf. Sci. Technol. 69(3), 349–358 (2018)
Morillas-Jurado, F.G., Caballer-Tarazona, M., Caballer-Tarazona, V.: Applying Benford’s Law to monitor death registration data: a management tool for the COVID-19 Pandemic. Mathematics 10(1), 46 (2021)
Nigrini, M.: A taxpayer compliance application of Benford’s Law. J. Amer. Taxation Assoc. Sarasota 18(1), 72–90 (1996)
Nigrini, M.J.: An assessment of the change in the incidence of earnings management around the Enron-Andersen episode. Rev. Acc. Financ. 4(1), 92–110 (2005)
Nigrini, M.: Benford’s Law: Applications for Forensic Accounting, Auditing, and Fraud Detection. Wiley, ISBN: 978-1-118-15285-0 (2012)
Nigrini, M. J.: Audit sampling using Benford's Law: a review of the literature with some new perspectives. J. Emerg. Tech. Account. 14(2), 29–46 (2017)
Nigrini, M.: The Benford Online Bibliography, Available at: https://www.benfordonline.net/list/chronological (2022)
Nguyen, T.T., Duong, C.M., Nguyen, N.T.M.: Is conditional conservatism a source of deviations of financial statements from Benford’s Law? J. Appl. Account. Res. (2022)
Park, J.A., Kim, M., Yoon, S.: Evaluation of large-scale data to detect irregularity in payment for medical services. Methods Inf. Med. 55(03), 284–291 (2016)
Petucci, S.D.: Benford’s Law: can it be used to detect irregularities in first party automobile insurance claims? J. Econ. Crime Manag. 3(1), 1–35 (2005)
Rauch, B., Göttsche, M., Engel, S., Brähler, G.: Fact and fiction in EU-governmental economic data. German Econ. Rev. 12(3), 243–255 (2011)
Rosner, R.L.: Earnings manipulation in failing firms. Contemp. Account. Res. 20(2), 361–408 (2003)
Soltani, B.: The anatomy of corporate fraud: a comparative analysis of high profile American and European corporate scandals. J. Bus. Ethics 120(2), 251–274 (2014)
The Financial Supervisory Authority (ASF): Inform note, Available at: https://asfromania.ro/uploads/articole/attachments/6061d1346b302823938474.pdf (2021a)
The Financial Supervisory Authority (ASF): Inform note, Available at: https://asfromania.ro/ro/a/2191/comunicat-de-pres%C4%83 (2021b)
The Financial Supervisory Authority (ASF): Statistical report, Available at: https://asfromania.ro/uploads/articole/attachments/6076d84132079929466644.pdf (2021c)
The Financial Supervisory Authority (ASF): DECIZIE nr. 1.148 din 17 septembrie 2021, Available at: https://legislatie.just.ro/Public/DetaliiDocument/246668 (2021d)
The Financial Supervisory Authority (ASF): Statistical report, available at: https://asfromania.ro/uploads/articole/attachments/625d3c3d7a4fa967149359.pdf (2022)
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2023 The Author(s), under exclusive license to Springer Nature Switzerland AG
About this paper
Cite this paper
Păunescu, M., Nichita, EM., Lazăr, P., Frățilă (Adam), A. (2023). Applying Benford’s Law to Detect Fraud in the Insurance Industry—A Case Study from the Romanian Market. In: Dima, A.M., Danescu, E.R. (eds) Fostering Recovery Through Metaverse Business Modelling. ICESS 2022. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-031-28255-3_4
Download citation
DOI: https://doi.org/10.1007/978-3-031-28255-3_4
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-031-28254-6
Online ISBN: 978-3-031-28255-3
eBook Packages: Business and ManagementBusiness and Management (R0)