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Best Practices in Detecting Payable Fraud Using Data Analytics


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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
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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Best Practices in Detecting Payable Fraud Using Data Analytics

  1. 1. Best Practices in Detecting  Accounts Payable Fraud  Using Data Analysis August 21, 2013 Special Guest Presenter: Katrina Kiselinchev, CIA, CPA, CFE 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. Copyright © 2013 FraudResourceNet™ LLC
  2. 2. 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 Copyright © 2013 FraudResourceNet™ LLC About Katrina Kiselinchev, CPA, CIA, CFE, CFF        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 . Instructor with AICPA & ACFE  Specific Frauds in Accounts Payable: Duplicates, P‐Card, Travel Copyright © 2013 FraudResourceNet™ LLC
  3. 3. Webinar Housekeeping This webinar and its contents are the property of FraudResourceNet™ LLC. 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 five-seven business days. Downloading or otherwise duplicating the webinar recording is expressly prohibited. You must answer the polling questions to qualify for CPE per NASBA unless you are viewing the Webinar with a group on a single screen. Please complete the evaluation to help us continuously improve our Webinars. 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 CS 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. 4. Agenda      Introduction Standards & Anti‐Fraud Essentials Auditors Fraud State of the Union Accounts Payable Background Accounts Payable Fraud  Overview  Schemes  Red Flags  Aiding Discovery of Fraud: Industry & Risks & Operations   Data Mining for AP Fraud: Analytics & Testing Methods  Case Studies & Practice in Data Analytics Copyright © 2013 FraudResourceNet™ LLC 6 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. 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. 6. Workplace Fraud Copyright © 2013 FraudResourceNet™ LLC Fraud State of the Union Source: 2012 ACFE Report to the  Nations Copyright © 2013 FraudResourceNet™ LLC
  7. 7. Fraud State of the Union Source: 2012 ACFE Report to the  Copyright © 2013 FraudResourceNet™ LLC Nations Learning Objectives      Uncover Check Fraud in Accounts Payable Detect Duplicate Billing Schemes Detect & Prevent Expense Reimbursement Scams Flag Bogus Invoices Identify Purchasing Card & Other Expense Scams & Schemes Copyright © 2013 FraudResourceNet™ LLC 13
  8. 8. Dishonest AP Fraudsters What They Do:  Create Fake Vendors, Expenses, Receipts, Invoices  Collude and Create Kickback Schemes  Misclassify Expenses   Understate Liabilities  Forge, intercept, alter and counterfeit checks   Take Advantage of Multiple Decentralized Policies  Preferred Vendor / Travel / Card/ P‐Card Copyright © 2013 FraudResourceNet™ LLC Accounts Payable Fraud: Schemes 1) External Accounts Payable Fraud:  Sham Vendors  Vendor Billing Scams/Double billing   Customer/Client Fraud  External Hacking of Customer/Vendor Data 2) Internal Accounts Payable Fraud:  Shell Company Schemes  Internal Billing Schemes  Vendor Master File   Check Tampering  Travel & Entertainment  Payroll Fraud  Copyright © 2013 FraudResourceNet™ LLC Continued…
  9. 9. Accounts Payable Fraud: Schemes 3) Collusion:  Bid‐Rigging  Invoice Billing Collusion  Bribery & Kickbacks  Pricing Schemes  Payroll Schemes  Copyright © 2013 FraudResourceNet™ LLC Polling Question 1 Which One of the Following is a Type of  Fraudulent Disbursement Scheme? A. B. C. D. Asset Req & Transfers Unrecorded Sales Write‐Off Schemes Shell Company Copyright © 2013 FraudResourceNet™ LLC
  10. 10. Accounts Payable Fails… Business Fails How a company manages its Accounts Payable process  affects two very important areas of an organization’s  business: Cash Flow and Supplier Relationships Fraud Impacting One or Both of These Areas is Detrimental.  Period. Internal Controls, Fraud Assessments, and Periodic Audits  are Very Important to Discover Issues Sooner Rather than  Later. Copyright © 2013 FraudResourceNet™ LLC Prevention of Common Schemes Prevention:         Periodically Review Vendor Listings Block Fake Receipt Sites Block Vendors Not on Approved Listings Block Certain Types of Vendors (P‐Cards) Disallow Acceptance of Non‐Itemized Receipts Implement Proper Segregation of Duties Implement Automated Controls Implement Budgets Copyright © 2013 FraudResourceNet™ LLC
  11. 11. Accounts Payables Data Analysis Techniques  Payments  Name, Address, Phone = Employees  Unusual Patterns in Check Amounts  Only P.O. Box Addresses Available  Improper Locations   Over & Under   Duplicates, Gaps  False  By Vendor  Inconsistent Price Fluctuations  Excessive Purchases > Budget  Unusual Billing Trends  By Accounts & Department   Unexpected Trends or Rates  Gross Profit  Price Adjustments Copyright © 2013 FraudResourceNet™ LLC 20 Detection of Common Schemes  Continuous Monitoring Through Data Analysis  Compare Vendor Invoice Numbers   Compare Vendor Spend v. Budget  Compare Vendor Overall Spend Trends & Approvals  Review Dates on Expenses Submitted for Non‐Working Days  Review for Proper Approver  Review for Expenses in Round Dollars  Review Top 80% Spend by Individual, Vendor, Type  Compare Submission to Prior Two Expense Reports for Fraud  Request Travel Confirmations  Review Monthly & Annual Mileage for Driving Validity & Reasonableness   Periodically Analyze & Review Gaps Copyright © 2013 FraudResourceNet™ LLC
  12. 12. Data Analytics for Fraud: Tools You Can Use Data Analytics       Traditional Auditing Large Amounts of Data  Identify Red Flags Faster Increased Coverage Determine Trends Continuous Analysis Process Improvement     Small Amounts of Data Delay in Identifying Red Flags Decreased Coverage Harder to ID Trends Show First View of IDEA Copyright © 2013 FraudResourceNet™ LLC 22 Polling Question #2 Which of the following is one of the Collusion  Schemes? A. Vendor Master File Tampering B. External Hacking of Accounts Payable C. Check Tampering D. Invoice Billing  Copyright © 2013 FraudResourceNet™ LLC 23
  13. 13. Case Study: IM A COLLUDING Initial Contact: You get an urgent call from someone in AP.  They have  reviewed accounts payable records, and found some  alarming red flags.  “Concerns about Fictitious Vendors” “Concerns about Vendors with Triple Spend Over Budget” “We Need a Data Analysis Expert… .. Massive Data” Copyright © 2013 FraudResourceNet™ LLC IM A Colluding       No Master Vendor Review 3+ Years No Duplicate Spend Review 5+ Years No Segregation of Duties Between Approving & Paying No Review of Proper Approver  No Budget v. Actual Review No Vendor Spend Trend Analysis . Copyright © 2013 FraudResourceNet™ LLC
  14. 14. Software Overview & Introduction  Set Working Folder  Import Data  Check Control Totals Copyright © 2013 FraudResourceNet™ LLC Polling Question 3 Which Preventative Control is IMA Colluding Lacking In? A. B. C. D. Master Vendor Review Budget v. Actual Vendor Spend Trend Analysis Duplicate Spend Review Copyright © 2013 FraudResourceNet™ LLC
  15. 15. Auditee Communication: Planning for Accounts Payable Fraud  Walk‐through of Approvals, Approvers, Policy   Procure‐to‐Pay Cycle   Complete Audit Plan with Data Analysis Incorporated  Include  Different Types Alongside Consideration of Fraud Copyright © 2013 FraudResourceNet™ LLC Data Gathering for Data Analysis Request All Meta Data Fields  & Files Employee ID, Type of Spend, $ Amount,  Budget Copyright © 2013 FraudResourceNet™ LLC
  16. 16. Discovery with DA: Spend Audits to Perform:  Approver Submissions  Vendor Spend Trends  Duplicates  Budget v Actual  Address v. Employee Address  Approver Submissions Summarize by Employee Red Flag #1: Approved  Purchase Orders Entered Copyright © 2013 FraudResourceNet™ LLC Polling Question 4 Name a Test That IMA Should Run Initially  to Identify Red Flags? A. B. C. D. Depreciation Calculation Inventory Expenses Submitted v. Co. Card Vendor Budget v. Actual Copyright © 2013 FraudResourceNet™ LLC
  17. 17. Discovery with DA: Duplicates Red Flag 1 & 2: Numerous Duplicates, Odd  Amounts & Quantities  Copyright © 2013 FraudResourceNet™ LLC Discovery with DA: Expense v. Card, Expense v. Budget, Type Red Flag #3: Spend Trends Red Flag 4: Duplicates Red Flag 5: Budget v Actual Copyright © 2013 FraudResourceNet™ LLC
  18. 18. Polling Question 5 Name the Red Flags Found A. B. C. D. Spend Trends and Duplicates Inventory Obsolescence Expenses Submitted v. Co. Card Contract Overages Copyright © 2013 FraudResourceNet™ LLC Finding Fraud & Next Steps 1)  Complete Summary of Data & Findings a) Total by Each Type of Discrepancy b) Aggregate Discrepancy 2)    Determine Additional Tests to Run & Perform 3) Discuss Findings with Owner Initially & Recommendations 4) Complete Interviews with Employees  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 Advisable e.g. Dollar Amount, Management, etc. 11) Complete Report (See  12) Complete Supporting Doc for Insurance Co. & Authorities Copyright © 2013 FraudResourceNet™ LLC
  19. 19. Formulating Anti-Fraud Policy  Policy Statement: To Prevent & Detect Fraud… and No  Tolerance  Definition of Fraud: Intent to Defraud & Personal Gain  Reporting Responsibilities: By Staff Level  Reporting Suspicions: Process & Avenues  Fraud Response Plan: Process Once Potential Investigation is  Warranted  Policy Communication: Avenues & Frequency Copyright © 2013 FraudResourceNet™ LLC Proactive Data Analysis Combining Audits & Data Analysis for Fraud Discovery Accounts Payable: Maintenance Per Diem & Petty Cash Bulk Fuel & Fuel Cards Supplier Contracts Travel & Entertainment Copyright © 2013 FraudResourceNet™ LLC
  20. 20. Accounts Payables Data Analysis Techniques  Payments  Name, Address, Phone = Employees  Unusual Patterns in Check Amounts  Only P.O. Box Addresses Available  Improper Locations   Over & Under   Duplicates, Gaps  False  By Vendor  Inconsistent Price Fluctuations  Excessive Purchases > Budget  Unusual Billing Trends  By Accounts & Department   Unexpected Trends or Rates  Gross Profit  Price Adjustments Copyright © 2013 FraudResourceNet™ LLC 38 Questions?  Questions? Copyright © 2013 FraudResourceNet™ LLC
  21. 21. Thank You! Website: Jim Kaplan FraudResourceNet™ 800-385-1625 Peter Goldmann FraudResourceNet™ 800-440-2261 Katrina Kiselinchev Inclusivitie, LLC 832-236-4778 Email: Copyright © 2013 FraudResourceNet™ LLC Coming Up This Month  “Continuous Controls Monitoring (Putting Controls in Place Is Not Enough)” (Sept. 11)  “Protecting Your Organization from the Growing Threat of Cyber Fraud” (Sept. 18)  “A Primer on Social Networking and Fraud Risk—What you Don’t Know Can Cost You” (Sept 25) Copyright © 2013 FraudResourceNet™ LLC