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Benford鈥檚 law and fraud A not-so-clever employee decided to fake his monthly expense report. He believed that the first digits of his expense amounts should be equally likely to be any of the numbers from 1to 9. In that case, the first digit Yof a randomly selected expense amount would have the probability distribution shown in the histogram.

(a). Explain why the mean of the random variable Y is located at the solid red line in the figure.

(b) The first digits of randomly selected expense amounts actually follow Benford鈥檚 law (Exercise 5). What鈥檚 the expected value of the first digit? Explain how this information could be used to detect a fake expense report.

(c) What鈥檚 P(Y>6)? According to Benford鈥檚 law, what proportion of first digits in the employee鈥檚 expense amounts should be greater than 6? How could this information be used to detect a fake expense report?

Short Answer

Expert verified

a). The mean lies at the center, which is5.

b). On average the first digit is 3.441.

c). If the proportion is closer to 0.3333than it is0.155 to , then it seems that the expense report is fake.

Step by step solution

01

Part (a) Step 1: Given Information 

Given in the question that, the first digits of his expense amounts should be equally likely to be any of the numbers from 1to 9.

02

Part (a) Step 2: Explanation 

The supplied distribution is symmetric (the graph to the left of 5is a mirror image of the graph to the right of 5) and the mean is located in the middle (which is 5).

03

Part (b) Step 1: Given Information 

Given in the question is a graph

04

Part (b) Step 2: Explanation 

Table 5shows the probability distribution of Benford's law.

The expected value is calculated by multiplying each possibility by its probability:

E(X)=xP(x)=10.301+20.176+30.125+40.097+50.079+60.067+70.058+80.051+90.046=3.441

05

Part (c) Step 1: Given Information 

Given that the first digits of his spending amounts might be any number from 1to 9,

06

Part (c) Step 2: Explanation 

Using the given uniform distribution, add the associated probabilities:

P(Y>6)=P(Y=7)+P(Y=8)+P(Y=9)=19+19+19=39=130.3333

Using Benford's law, add the corresponding probabilities:

P(Y>6)=P(Y=7)+P(Y=8)+P(Y=9)=0.058+0.051+0.046=0.155

Determine the percentage of cost reports with first digits greater than 6. If this proportion is closer to 0.3333than to 0.155, the cost report appears to be false.

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