Mother Nature’s Footstool (MNF) is a manufacturer of natural hardwood furniture. It has been in operation since 2000 and is located in Louisiana, the birthplace of swamp logging. Jake and Blake, the founders of the company, began building furniture in their parents’ garage using a special type of wood only found in the bottom of Bayou swamps. Their unique product quickly gained popularity and they began to experience rapid growth. During the first several years of their business Jake and Blake kept meticulous accounting records and were sure to confirm each vendor invoice before making a payment. Jake and Blake took great pride in their business’ high profit margin, evidence, they believed, of the high demand for their furniture. Recently, however, the paperwork had become too heavy for them to handle on their own, so they decided to hire on Eric, an accounting graduate from UVU, to help keep their books, handle procurement, and manage their Accounts Payable function. During the same time they also branched out from their main product of swamp-log furniture into other types of furniture, requiring them to grow their number of vendors from three to eight. Mother Nature’s 8 current vendors are: Swamp Loggers Inc., Premium Timber Suppliers, Walters Lumber Yard, Tree Line USA, 84 Lumber Co, Exotic Woods USA, Trees R Us, and Jack’s Lumber. The increase in suppliers is quite recent; therefore, the owners of the business do not have close relationships with any of the new suppliers. They rely on the accounting staff to build and maintain relationships with the new suppliers.
Recently MNF has noticed a decline in their overall profit margin. Jake and Blake were surprised by this decline because their business seemed to be booming. In an effort to better understand what could be happening, Blake asked the accounting staff to prepare a report to provide evidence as to why the profit margin was dropping. After close analysis, the report showed that supply costs had increased substantially on a per-unit basis since expanding MNF’s furniture offerings and vendor relations. After doing a market analysis Blake and Jake realized that market prices for lumber, their raw material, were not increasing, and concluded that something strange was afoot in the growing business of MNF. Blake and Jake are on the paranoid side of life, so they decided that they would conduct fraud detection techniques by first using an approach they learned about in business school, Benford’s Law.
Jake and Blake knew that, according to Benford’s Law, they could expect the first digit of the invoice totals being charged by their eight vendors to approximate the distribution of the Benford’s Law probability values. Despite the relatively small amount of data they collected for the distribution, it was clear