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A Fuzzy-based Algorithm for Auditors to Detect Element of Fraud in Settled Insurance Claims

Odette School of Business Administration Working Paper No. 03-9

19 Pages Posted: 12 Oct 2003  

Jagdish Pathak

University of Windsor - Odette School of Business

Navneet Vidyarthi

University of Waterloo - Faculty of Engineering

Scott L. Summers

Brigham Young University - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: 2003

Abstract

In the current global economy, the survival of insurance companies depends on its ability to respond to the customer demands, which are settlements of the insurance claims. All insurance companies face the conflicting goals of settling claims quickly and authenticating the claims. The increasing cost of human experts in fraud detection has led many companies to develop expert systems, which respond to the needs of the companies in a cost effective and efficient way. It has been observed that the opportunity exists for claim adjustors to settle insurance claims in favor of the claimants simply by colluding with the claimant and sacrificing the monetary interest of the insurers. This use of experts in claim settlement leaves room for subjective judgment and the use of discretion while finalizing a claim. In this paper, we develop a fuzzy logic based expert system that can evaluate and identify the elements of fraud involved in insurance claims settlement. It helps to decide if the claims settled are genuine or their exists an element of fraud which needs substantive testing by an auditor. The proposed methodology has been illustrated with an example that tends to model insurance claims in general. The main contributions of this paper are the 'index of ambiguity' and the fuzzy-logic based methodology to detect an element of fraud in the previously settled insurance claims.

Keywords: auditing fraudulent claim settlements, ambiguity index, forensic audit, fuzzy logic, expert system, information systems assurance

JEL Classification: M41, M49

Suggested Citation

Pathak, Jagdish and Vidyarthi, Navneet and Summers, Scott L., A Fuzzy-based Algorithm for Auditors to Detect Element of Fraud in Settled Insurance Claims (2003). Odette School of Business Administration Working Paper No. 03-9. Available at SSRN: https://ssrn.com/abstract=445122 or http://dx.doi.org/10.2139/ssrn.445122

Jagdish Pathak (Contact Author)

University of Windsor - Odette School of Business ( email )

401 Sunset
Windsor N9B 3P4, Ontario
Canada
519-253-3000 ext. 3131 (Phone)
519-973-7073 (Fax)

HOME PAGE: http://www.jagdishpathak.com

Navneet Vidyarthi

University of Waterloo - Faculty of Engineering ( email )

Waterloo, Ontario N2L 3G1
Canada

Scott L. Summers

Brigham Young University - School of Accountancy ( email )

516 TNRB
Provo, UT 84602
United States
801-422-9790 (Phone)
801-422-0621 (Fax)

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