Ways to Beat Vendor and Procurement Fraudsters Using Data Analysis

Ways to Beat Vendor and
Procurement Fraudsters using
Data Analysis
March 13, 2013
Special Guest Presenter:
Katrina Kiselinchev, CIA, CPA, CFE, CFF

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® Anti‐Fraud 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.


About Jim Kaplan, MSc, CIA, CFE
 President and Founder of AuditNet®, the global resource for auditors
 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


About Katrina Kiselinchev, CPA, CIA, CFE, CFF
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





President of Inclusivitie, We Do “SMART”
Integration Partner with IDEA
Experience across industries, audit, fraud, and value
Achieved Value of $5+ Million & ROI of 2000+%, which
included using IDEA’s SMART Analyzer .
Adjunct Professor at Georgia State University
Specific Fraud in Accounts Payable e.g. Vendor Overcharges,
Duplicates, and Diversion of Refunds


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

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5

Learning Objectives

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Costliest Procurement Frauds to Beware of
Indicators of Possible Collusive Procurement Vendor Schemes
Red Flags to Look for in Audits of Procurement Using Data Analytics
How to Conduct the Audit Using Data Analytics
What to Do if you Find Vendor or Procurement Fraud


6

Agenda
 Introduction
 Standards & Essentials
 Fraud State of the Union
 In the News: Costliest Forms of Payables Fraud
 Accounts Payable Fraudsters
 IMA Manufacturing Company Case
 Planning for Accounts Payable Fraud
 Data Gathering & Software Introduction
 Discovery with DA: Is There Fraud at IMA Manufacturing
 Red Flag Detection & Collusion
 Finding Accounts Payable Fraud & Next Steps


7

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


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.


Professional Guidance


Fraud State of the Union

2012 ACFE
Report to the
Nations


Fraud State of the Union

2012 ACFE Report
to the Nations


In the News: Costliest Forms of
Accounts Payable Fraud
According to ACFE's "Report to the Nation on Occupational Fraud and Abuse":
 > 39% of Fraud Cases in AP Occur in Business with < 99 Employees
 AP Fraud Accounts for 35+% of Total Fraud
 Banking & Financial Services, Government, and Manufacturing Highest Fraud%
 Average is $75,000 Per Occurrence
Types
 Fictitious Suppliers, Users, Companies, Bank Accounts
 Overstated, Fictitious and Duplicate Expenses
 Kickback Schemes with Vendors
 Diversion of Payments
 Understated Accounts Payable


In the News:
$8 Million Dollar E-Mail
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US Publishers Inc.
$7.6 Billion + in Sales
29K+ Employees
Founded in 1920’s
2011: AP Department received an e‐mail from one of
their vendors indicating that future payments should
be directed to a new bank account. Fair enough.
These changes do happen from time to time.
 $8 million later the company realized they were the
victims of a pretty simple scheme by conman John
Ramsey.


In the News:
$8 Million Dollar E-Mail & Scheme
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Company Established with Name “Quad Graph”
Real Vendor Name: “Quad/Graphics.”
Bank Account Opened for Ramsey’s Company
Address Change E‐Mail Sent to A/P at US Publishers
Waiting for $ to Roll In
$8MM Later…
It Could Happen to You


Perpetrators


Polling Question 1
Types of Accounts Payable Scheme (Choose all
that apply):
a)
b)
c)
d)

Fictitious Supplier
Worker’s Compensation
Diversion of Payments
Check Counterfeiting


IMA MANUFACTURING CO.
Initial Contact:
Mike Manufacture, CEO of IMA Manufacturing Co. thinks
there may be some procurement fraud going on.
 “Concerns about Suppliers, Potential Kickbacks,
Vendors, Expenses, and Collusion
 “We Need a Data Analysis Expert”
 “What Tools Do You Use”?


Background of the Case
 250+ Vendors with RFP Process, No Comparison of Vendors
 No Vendor Review or Audit Done
 Two People in AP with Overlapping Duties, Clerk & Manager
Procurement Mgr
No vacations in 2+ Years
New Rolls Royce
Off Half Day (Sick Child)

AP Clerk
Discovered Vendor Used with No Budget
Large Vendors Vetted Through Procurement
Fake Vendor Spend=$100K+
Address Matched Spouse Office Bill Came In
of AP Manager

Procurement Manager Terminated After Exit Interview
Claims Total of the Fraud is $100K Found
CEO Thinks There is More
Suspicions About AP Clerk
.


Client Communication:
Planning for Accounts Payable Fraud

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Walk‐through of Vendor Set‐Up & Screening
Procure‐to‐Pay Cycle, Statements, Entries, Due Diligence
Complete Audit Plan with Data Analysis Incorporated
Include Request for Proposal Process, Gaps,
Comparisons to Similar Vendor Pricing, Comparison to
Contract Pricing
“Concerns about Suppliers,
Potential Kickbacks, Vendors,
Expenses, and Collusion


Polling Question 2

The percentage of fraud committed by business
owners in 2012 is...
a)
b)
c)
d)

55%
18%
35%
22%


Data Analytics for Fraud:
Software Overview
Data Analytics
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Traditional Auditing

Large Amounts of Data
Identify Red Flags Faster
Increased Coverage
Determine Trends
Continuous Analysis
Process Improvement

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Small Amounts of Data
Delay in Identifying Red Flags
Decreased Coverage
Harder to ID Trends

Show First View of IDEA


22

Procure-to-Pay Process

Procurement Mgr
Performs “Vendor Approval” for
High Use & Spend Vendors

AP Clerk
Enters Bills

Operational Mgr
Approves Bills for ONLY
Budgeted Spend

No Additional Review
No Budget to Actual
No System Controls for Manager to Pay Bills
AP Manager
Pays Bills

Polling Question 3

What Is/Are Added Preventative Control(s) for IMA
Manufacturing to Consider?
a. Disallow System Access to AP Manager
for Vendor Set‐Up
b. Add Additional Review at the End
c. Neither of the Above
d. Both a and b

Discovery with Data Analysis
Is There Fraud at IMA?
Audits to Perform:
 Total Vendor Spend:
 Summarize in IDEA
 Run Duplicate Test
 Review Budgets for Vendors vs. Spend
 Join Databases by Vendor ID
 Review Vendor Addresses vs. Employees
 Strip Addresses in Both Files
 Join Databases by Address Comparison
 Request Data in Line with Tests.
Notify Management & Team this May Expand. Preliminary Request

Data Gathering for Data Analysis
Request All Meta Data Fields & Files
Accounts Payable
 Vendor Name
 Vendor ID & Site & Address
 Purchase Order
 History for X Time Period
Demonstration of Files Provided
 Posted & Approved by ID
 Budgets by Vendor
 Comments
 Changes to Fields & Who Made Them
Employees
 Employee ID
 Employee Address
 Position

Software Overview & Introduction
 Set Working Folder
 Import Data
 Check Control Totals


Software Overview & Introduction
 Set Working Folder
 Import Data
 Check Control Totals


Polling Question 4

How Do You Start a New Audit Using IDEA?
a) Import Data, Create Working Folder
b) Create Working Folder, Check Control Totals
c) Create Working Folder, Import Data, and Check
Control Totals


Discovery with DA: Spend
Audits to Perform:
Total Vendor Spend:
Summarize IDEA
Duplicate Tests

Red Flag #1: Two Vendors with
Significant % in Spend Over
Others
Univar & Extra


Discovery with DA: Duplicates

Red Flag #2: Same Two Vendors with
Significant Duplicates
Houston, Brentag, Univar & Extra
& Other Odd Round Amounts


Discovery with DA: Budgets
Audits to Perform:
Budgets to Spend
Join Budget & Expense
Summary Databases by
Vendor ID


Discovery with DA: Budgets

Red Flag #3: Univar Spend $1.3MM vs. Budget
of $5K. 2 Others with Overages.


Discovery with DA: Address
Review Vendor Addresses vs. Employees
Strip Addresses in Both Files
Join Databases by Address
Comparison
Employee Database v Expense

Red Flag #4: 5 Vendors Including Univar
Match Employee Address


Red Flags for Accounts Payable Fraud

 Unrecorded Liabilities
 Journal Entries
 Unauthorized Parties
 After Close
 Fictitious Vendors & Suppliers
 Duplicate Payments
 No three way match between:
 Purchase Orders
 Receipt of Goods
 Invoice
 Budget Overruns
 Address Match for Vendor v Employee

Polling Question 5

Which of the following is/are Red Flag(s)/
Finding(s) Identified in IMA Manufacturing Case?
1.
2.
3.
4.

Vendor Addresses Match Employee Addresses
Vendor Spend is Excessive Over Budgeted Amounts
Terminated Employees Receiving Paychecks
1 & 2 Above


Total Fraud Found & Next Steps
1)  Complete Summary of Data & Findings
a) Total by Employee with Address Matches
b) Total by Vendor
c) Total Budget vs. Spend
2)    Determine Additional Tests to Run & Perform
3) Discuss Findings with CEO Initially & Recommendations
4) Complete Interviews with Employees & Leave Alleged Matches for End
5) Review Gaps & Control Deficiencies & Provide Recommendations
6) Recommend Management Review for Cost v Benefit & Implement ASAP
7) Determine if Client has Fraud Insurance Rider.  If not, recommend.
8) Contact Insurance Carrier (if applicable) & Begin Claim Process.
9) Contact Authorities & File Report.
10) Determine if Prosecution is Viable e.g. Dollar Amount, Management, etc.
11) Complete Report (See ACFE.com)
12) Complete Supporting Doc for Insurance Co. & Authorities

Preventing Accounts Payable Fraud
Prevention of IMA Manufacturing:
 Segregation of Duties for Set‐Up, Bill Entering, Payment, and Review
 Restrict Access to the Software for Function of Vendor Addition
 Have Removed Approver for Payables
 Implement Controls for Budget Excess
 Implement System Controls
 Run Budget vs. Actual Monthly
Continuous Monitoring
 Complete Risk Assessment & Annual Audit Plan with Data Analysis
 Determine Monthly & Quarterly Tests by Priority
 Implement Data Analysis Testing
 Perform & Complete Ongoing Control Assessments


Polling Question 6

Which Two Things Would Have Caught IMA
Manufacturing Fraud Sooner…
a.
b.
c.
d.

Procurement Manager from Sole Vendor Selection
Budget v Actual Spend Analysis Monthly
Implement Data Analysis Testing
B & C


Questions?
 Any Questions?
Don’t be Shy!


Thank You!
Website: http://www.fraudresourcenet.com
Jim Kaplan
FraudResourceNet™
800-385-1625
jkaplan@fraudresourcenet.com
Peter Goldmann
FraudResourceNet™
800-440-2261
pgoldmann@fraudresourcenet.com
Katrina Kiselinchev
Inclusivitie, LLC
832-236-4778
katrina@inclusivitie.com
http://www.inclusivitie.com

Ways to Beat Vendor and Procurement Fraudsters Using Data Analysis

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