Detecting Fraud in Development Aid

47 Pages Posted: 19 Dec 2022 Last revised: 26 Jan 2025

See all articles by Jean Ensminger

Jean Ensminger

California Institute of Technology (Caltech)

Jetson Leder-Luis

Boston University

Date Written: December 2022

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.We 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.

Suggested Citation

Ensminger, Jean and Leder-Luis, Jetson, Detecting Fraud in Development Aid (December 2022). NBER Working Paper No. w30768, Available at SSRN: https://ssrn.com/abstract=4306723

Jean Ensminger (Contact Author)

California Institute of Technology (Caltech) ( email )

Pasadena, CA 91125
United States

Jetson Leder-Luis

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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