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Uncovering Fraud in Key Financial Accounts using Data Analysis
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Uncovering Fraud in Key Financial Accounts using Data Analysis


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Webinar series from FraudResourceNet LLC on Preventing and Detecting Fraud Using Data Analytics. Recordings of these Webinars are available for purchase from our Website …

Webinar series from FraudResourceNet LLC on Preventing and Detecting Fraud Using Data Analytics. Recordings of these Webinars are available for purchase from our Website
This Webinar focused on fraud detection using data analytic software (Excel, ACL, IDEA)
FraudResourceNet (FRN) is the only searchable portal of practical, expert fraud prevention, detection and audit information on the Web.
FRN combines the high quality, authoritative anti-fraud and audit content from the leading providers, AuditNet ® LLC and White-Collar Crime 101 LLC/FraudAware.
The two entities designed FRN as the “go-to”, easy-to-use source of “how-to” fraud prevention, detection, audit and investigation templates, guidelines, policies, training programs (recorded no CPE and live with CPE) and articles from leading subject matter experts.
FRN is a continuously expanding and improving resource, offering auditors, fraud examiners, controllers, investigators and accountants a content-rich source of cutting-edge anti-fraud tools and techniques they will want to refer to again and again.

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  • 1. Uncovering Fraud in Key Financial Accounts using Data Analysis November 12, 2013 Special Guest Presenter: Don Sparks, CIA, CISA, CRMA Vice President, Audimation Services Inc Partner with CaseWare IDEA Copyright © 2013 FraudResourceNet™ LLC About Peter Goldmann, MSc., CFE  President and Founder of White Collar Crime 101 Publisher of White-Collar Crime Fighter Developer of FraudAware® AntiFraud Training Monthly Columnist, The Fraud Examiner, ACFE Newsletter  Member of Editorial Advisory Board, ACFE  Author of “Fraud in the Markets” Explains how fraud fueled the financial crisis. Copyright © 2013 FraudResourceNet™ LLC
  • 2. About Jim Kaplan, MSc, CIA, CFE President and Founder of AuditNet®, the global resource for auditors (now available on Apple and Android devices) Auditor, Web Site Guru, Internet for Auditors Pioneer Recipient of the IIA’s 2007 Bradford Cadmus Memorial Award. Author of “The Auditor’s Guide to Internet Resources” 2nd Edition Copyright © 2013 FraudResourceNet™ LLC CIA, CISA, CRMA, ARM  Vice President Industry Relations     Don Sparks   Audimation Services, Inc. 24-years property/casualty insurance internal audit experience (12 as CAE) ISACA Central Florida Board NAIC IT Working Papers Committee 6-years The IIA – eLearning: GAIN, Flash Surveys, & Role of Audit in SOX 2002 monthly 2 hour web broadcasts Co-Author of GTAG 13 & GTAG 16 June 2011, Creator & Programmer Copyright © 2013 FraudResourceNet™ LLC
  • 3. Webinar Housekeeping  This webinar and its material are the property of AuditNet® and FraudAware®. Unauthorized usage or recording of this webinar or any of its material is strictly forbidden. We will be recording the webinar and you will be provided access to that recording within 5 business days after the webinar. Downloading or otherwise duplicating the webinar recording is expressly prohibited.  Webinar will be recorded and will be made available as soon as possible.  Please complete the evaluation to help us continuously improve our Webinars.  You must answer the polling questions to qualify for CPE per NASBA.  Submit questions via the chat box on your screen and we will answer them either during or at the conclusion.  If GTW stops working you may need to close and restart. You can always dial in and listen and follow along with the handout. Copyright © 2013 FraudResourceNet™ LLC Disclaimers  The views expressed by the presenters do not necessarily represent the views, positions, or opinions of FraudResourceNet LLC (FRN) or the presenters’ respective organizations. These materials, and the oral presentation accompanying them, are for educational purposes only and do not constitute accounting or legal advice or create an accountant-client relationship. While FRN makes every effort to ensure information is accurate and complete, FRN makes no representations, guarantees, or warranties as to the accuracy or completeness of the information provided via this presentation. FRN specifically disclaims all liability for any claims or damages that may result from the information contained in this presentation, including any websites maintained by third parties and linked to the FRN website. Any mention of commercial products is for information only; it does not imply recommendation or endorsement by FraudResourceNet LLC. Copyright © 2013 FraudResourceNet™ LLC 5
  • 4. Today’s Agenda  The auditor’s role in detecting and preventing fraud  Drilling into financial & operational data to look for  red flags of fraud [procurement/AR/disbursements/  operations/inventory/etc.]  Which business processes/procedures lend  themselves best to data analysis for fraud   Preparing for a transaction‐level data analysis test  Gathering the data you need to do a fraud analysis  How to reduce false positives  Copyright © 2013 FraudResourceNet™ LLC The Auditor’s Role  IPPF Standard 1210.A3  Internal auditors must have sufficient knowledge of…available technology based audit techniques to perform their assigned work Copyright © 2013 FraudResourceNet™ LLC
  • 5. IIA Guidance – GTAG 13 Internal auditors require appropriate skills and should use available technological tools to help them maintain a successful fraud management program that covers prevention, detection, and investigation. As such, all audit professionals — not just IT audit specialists — are expected to be increasingly proficient in areas such as data analysis and the use of technology to help them meet the demands of the job. Copyright © 2013 FraudResourceNet™ LLC Professional Guidance Copyright © 2013 FraudResourceNet™ LLC
  • 6. Do Patterns in Data Mean Anything Statistics students are asked to  perform a simple task.  Create a  matrix of heads and tails by  recording the results of 200 coin  flips.  The professor reviews the  results and easily identifies the  students that just made up the  results without flipping a coin.   How did he know? Copyright © 2013 FraudResourceNet™ LLC Expectations  Are you LOOKING for fraud?  Never going to eliminate Fraud  Hope it never happens is ok, but a prudent auditor will plan for being involved in fraud issues:  Awareness of Red Flags (IPPF)  Consider professional CAATTs (IPPF)  Continuously improve internal control’s  Develop work a-rounds for false positives  COSO provides an excellent framework Copyright © 2013 FraudResourceNet™ LLC
  • 7. Largest Fraud You can read about the biggest fraud I detected as an internal auditor in the June 2012 Internal Auditor magazine. There were no tips or red flags and I had worked at this company for 10 years. The fraud scheme was simple, saving credit balances on canceled insurance accounts in accounts receivable, an area I assumed the external auditors covered thoroughly. Copyright © 2013 FraudResourceNet™ LLC Polling Question 1 Most auditors will never detect fraud in the organization of employment in their lifetime: A. True B. False Copyright © 2013 FraudResourceNet™ LLC
  • 8. ACFE 2012 Report Occupational Fraud and Abuse:  Compiled from 1,388 cases  From Jan. 2010 - Dec. 2011  By CFEs investigating those cases  Cases from 94 nations “most striking about the data gathered is how consistent the patterns of fraud are around the globe and over time” Copyright © 2013 FraudResourceNet™ LLC Proactive Anti‐Fraud Program Copyright © 2013 FraudResourceNet™ LLC
  • 9. Creating a Continuous  Auditing Application Source: July 2011 ISACA Copyright © 2013 FraudResourceNet™ LLC Why Internal Auditing Matters Copyright © 2013 FraudResourceNet™ LLC
  • 10. Audit Life Cycle Copyright © 2013 FraudResourceNet™ LLC Start with the Audit Program No two audits are alike; customize to fit the audit objective and the client Audit Test Activity Occurance/ existance Accuracy/ valuation Completeness Inspection Observation Reconciliation Data Analysis Interview Tracing Vouching Copyright © 2013 FraudResourceNet™ LLC Cutoff Classify Disclosure
  • 11. Polling Question 2 In the ISACA white paper titled Data Analytics – A Practical Approach which of the following phases is not included in the maturity model? 1. Ad Hoc Analysis 2. Data Cleansing 3. Repeatable 4. Consistent 5. Continuous Auditing Copyright © 2013 FraudResourceNet™ LLC Data Analysis Process Copyright © 2013 FraudResourceNet™ LLC
  • 12. Data Analysis Top Challenges CFO 2012 Copyright © 2013 FraudResourceNet™ LLC Governance – Data Access Copyright © 2013 FraudResourceNet™ LLC
  • 13. Rules for Auditors to Follow       Work on a COPY of Clients data Document all actions taken with data Audit tests repeatable with same results Do not make changes to client data Maintain custody & security of data Properly store and destroy data Copyright © 2013 FraudResourceNet™ LLC What is a “Red Flag” Understanding symptoms of fraud is the key to detecting fraud. A symptom of fraud may be defined as a condition which is directly attributable to dishonest or fraudulent activity. It may result from the fraud itself or from the attempt to conceal the fraud. Internal Auditor – June 2012 Copyright © 2013 FraudResourceNet™ LLC
  • 14. Polling Question 3 The most common means of detecting fraud according to the 2012 ACFE Report to the Nations is: A. B. C. D. E. Internal Auditors External Auditors By accident Notified by police Tips Copyright © 2013 FraudResourceNet™ LLC Where to Look Read the local newspaper, trade magazines, web blogs, etc. Could it happen here? Copyright © 2013 FraudResourceNet™ LLC
  • 15. Where to Look – “Tips” Is your “door” open? ACFE RTTN “Squirrel” File Notebook Copyright © 2013 FraudResourceNet™ LLC Where to Look ACFE RTTN Copyright © 2013 FraudResourceNet™ LLC
  • 16. Where to Look ACFE RTTN Copyright © 2013 FraudResourceNet™ LLC Understand what Fraud looks like in your organization ACFE RTTN Copyright © 2013 FraudResourceNet™ LLC
  • 17. Obvious Signals – Red Flags  Transactions that are odd as to:  Time of day, week, month, year, or season  Frequency (many, few), Places (far, near, or "Far out"), Amount (high, low, consistent, alike, different), Parties or personalities (related parties, oddball personalities, strange and estranged relationships, management performing clerical functions)  Internal controls that are not enforced or too often compromised by higher authorities Copyright © 2013 FraudResourceNet™ LLC Request - Use Existing Tools Copyright © 2013 FraudResourceNet™ LLC
  • 18. Indicate Appropriate System(s) Copyright © 2013 FraudResourceNet™ LLC Complete Form Copyright © 2013 FraudResourceNet™ LLC
  • 19. Data Reconciliation Principles Once the data has been obtained it must be read into your data analysis tool. Before commencing testing, it is important the data is reconciled back to the "client’s" system. Potential errors are:  Requesting the wrong data  Being supplied with the wrong data (and/or wrong time)  Errors on the extraction of data from the host system  Problems when transferring the data to PC or media  Errors when importing the data, etc. Copyright © 2013 FraudResourceNet™ LLC Reducing False Positives Balancing act – how to be surgical and precise, not a rip-saw 1. Better tuning - Test results to determine the cause and develop an exclusion list of most common false alerts 2. Proactive defense - Prioritize the results to eliminate many false positives (newest date, low dollar amount) 3. Involve the business - The business people may know, carefully involve what they already know in the process Copyright © 2013 FraudResourceNet™ LLC
  • 20. Journal Entry Tests     Nonbalancing JE Missing JE’s Unusually large line item entries JE posted on a specific date, time, or week day Copyright © 2013 FraudResourceNet™ LLC Polling Question 4 Which one of the following is not a critical task as defined by the IIA Red Book? 1. Achievement of the organization’s strategic objectives 2. Reliability & integrity of financial & operational information 3. Effectiveness & efficiency of operations & programs 4. Fraud Prevention and Detection 5. Compliance with laws, regulations, policies, procedures Copyright © 2013 FraudResourceNet™ LLC
  • 21. Additional JE Tests           JE by user id Summary by account contributions JE with rounded amounts JE with amounts that end in 999 JE with specific comments Summary by account number JE by posted period and Journal Source JE by period Account balances by Journal Source Account balances by period Copyright © 2013 FraudResourceNet™ LLC Accounts Receivable Tests  Customers Exceeding Credit Limit  Aging of open receivables  Unresolved Credit Balances Copyright © 2013 FraudResourceNet™ LLC
  • 22. Additional AR Tests  Debtors transaction summary  Transactions around a certain date  Duplicate Field Search Copyright © 2013 FraudResourceNet™ LLC Accounts Payable Tests       Duplicate Detection Aging Function Determine the pay date from set up date Employees in Vendor Master File Travel and Entertainment False entries in AP Copyright © 2013 FraudResourceNet™ LLC
  • 23. Additional AP Tests  Recurring identical amounts from the same vendor.  Unusual even dollar or high cash disbursement amounts for routine odd dollar or low value purchase.  Multiple remittance addresses for the same vendor.  Vendor addresses not the same as vendor approval application.  Sequential invoice numbers from the same vendor or invoice numbers with an alpha suffix.  Payments to vendor have increased dramatically for no apparent reason.  Invoices without purchase order numbers  Transactions with rounded amounts Copyright © 2013 FraudResourceNet™ LLC Accounts Payable - SOD  Processing of invoice and updates to vendor master files  Check preparation and posting to vendor account  Check preparation and mailing of signed checks  No proper documentation of additions, changes, or deletions to vendor master file  Excessive credit adjustments to a particular vendor and/or credit issued by unauthorized department (credits involving quantities and price)  Systematic pattern of adjustments for goods returned Copyright © 2013 FraudResourceNet™ LLC
  • 24. Inventory Tests  Re-computation of Cost of Items  Isolating Large Inventory Items  Searching for Zero or Negative Unit Costs Copyright © 2013 FraudResourceNet™ LLC Additional Tests Inventory         Aging by receipt date and ending inventory balance Aging by receipt date and unit cost Calculate inventory turnover ratio Inventory location summary Inventory received around specified dates Last sales price lower than unit cost Compare sales price with unit cost Duplicate field search Copyright © 2013 FraudResourceNet™ LLC
  • 25. Polling Question 5 Which of the following could be a red flag of fraud during journal entry testing? (Either a dishonest act or fraud activity and/or concealment) 1. Numerous Non-balancing JE’s 2. Missing JE’s 3. Unusually large line item entries posted near the end of a period 5. All of the above Copyright © 2013 FraudResourceNet™ LLC Expand Your Reach You do not need to be a programmer or an expert IT Auditor to make a simple script from work already completed:  Repeatable  Continuous Copyright © 2013 FraudResourceNet™ LLC
  • 26. Conclusion – Some Advice 1. The data is good 2. The analysis is correct 3. The necessary data is readily available 4. The data speaks for itself 5. Management will terminate the offender 6. Only the perpetrator knew about the scam 7. Best practice at one company will work for all 8. One “tool” will work in all situations 9. Fraud can’t happen in your company 10. Know tools, competencies, company, industry! Copyright © 2013 FraudResourceNet™ LLC Questions?  Any Questions? Don’t be Shy! Copyright © 2013 FraudResourceNet™ LLC
  • 27. Thank You! Website: Jim Kaplan FraudResourceNet™ 800-385-1625 Peter Goldmann FraudResourceNet™ 800-440-2261 Don Sparks 832-327-1877 Copyright © 2013 FraudResourceNet™ LLC Coming Up This Month  Fraud Risks Associated with Management Override of Controls November 14 1:00 PM  Using Data Analytics to Detect and Prevent Corporate and P-Card Fraud November 20 11:00 AM  To register and pay go to Copyright © 2013 FraudResourceNet™ LLC