Quick Response Fraud Detection


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Quick Response Fraud Detection

  1. 1. 6/18/2014 1 Copyright © FraudResourceNet LLC Quick Response Fraud Detection using Data Analytics:  Hitting the Ground Running using Technology in a  Suspected Fraud Case June 18, 2014 Special Guest Presenter: Rich Lanza Copyright © FraudResourceNet LLC 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 Peter Goldmann, MSc., CFE
  2. 2. 6/18/2014 2 Copyright © FraudResourceNet LLC 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 © FraudResourceNet LLC Richard B. Lanza, CPA, CFE, CGMA • Over two decades of ACL and Excel software usage • Wrote the first practical ACL publication on how to use the product in 101 ways (101 ACL Applications) • Has written and spoken on the use of audit data analytics for over 15 years. • Received the Outstanding Achievement in Business Award by the Association of Certified Fraud Examiners for developing the publication Proactively Detecting Fraud Using Computer Audit Reports as a research project for the IIA • Recently was a contributing author of: • Global Technology Audit Guide (GTAG #13) Fraud in an Automated World - IIA • Data Analytics – A Practical Approach - research whitepaper for the Information System Accountability Control Association. • “Cost Recovery – Turning Your Accounts Payable Department into a Profit Center” – Wiley & Sons. Please see full bio at www.richlanza.com
  3. 3. 6/18/2014 3 Copyright © FraudResourceNet LLC The CPE certificates and link to the recording will be sent to the email address you registered with in GTW. We are not responsible for delivery problems due to spam filters, attachment restrictions or other controls in place for your email client. Submit questions via the chat box on your screen and we will answer them either during or at the conclusion. After the Webinar is over you will have an opportunity to provide feedback. Please complete the feedback questionnaire to help us continuously improve our Webinars If GTW stops working you may need to close and restart. You can always dial in and listen and follow along with the handout. This webinar and its material are the property of FraudResourceNet LLC. Unauthorized usage or recording of this webinar or any of its material is strictly forbidden. We are recording the webinar and you will be provided with a link access to that recording as detailed below. Downloading or otherwise duplicating the webinar recording is expressly prohibited. Webinar recording link will be sent via email within 5-7 business days. NASBA rules require us to ask polling questions during the Webinar and CPE certificates will be sent via email to those who answer ALL the polling questions Webinar Housekeeping Copyright © FraudResourceNet LLC 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 6 Disclaimers
  4. 4. 6/18/2014 4 Copyright © FraudResourceNet LLC Today’s Agenda  Which data files should be requested in the area of concern or what should the data request look like when there is no specific area of concern.  Using a fast-track process to validating data and understanding statistical norms for benchmarking purposes. Statistical techniques to be utilized include: standard deviation, a unique method of combining Benford’s Law and other digital analysis techniques, time/size stratifications, and value/volume difference scattergraphs.  How the general ledger can provide a digital road map for analytics for fraud (and errors) within the organization.  How to quickly gather report ideas and techniques for analysis, as well as, obtain a list of some of the top fraud tests by process area. (continued) Copyright © FraudResourceNet LLC Today’s Agenda (continued)  How to combine your reports for maximum impact and understanding this concept within a specific review of accounts payable. Additional report techniques that can be applied to expected data files include user transaction analysis, data file change reviews, and external data mapping.  Understand a provided Excel macro tool (free as part of the course) that will quickly map an entire hard drive in minutes. Various applications of this tool will be presented.  Your Questions  Conclusion
  5. 5. 6/18/2014 5 Copyright © FraudResourceNet LLC Most Popular Products   Microsoft Excel  ActiveData for Excel  TopCaats  Microsoft Access  ACL  IDEA  WizRule, WizWhy, & WizSame  (WizSoft products) Copyright © FraudResourceNet LLC Tool Selection  Considerations  Core processing features  Advanced features  Advanced data import  Scripting  Ease of use  Training / Customer Support / User Groups   Years in business / Company sustainability  Workpaper system integration
  6. 6. 6/18/2014 6 Copyright © FraudResourceNet LLC Proposal Decision Analysis Page 11 http://www.caseware.com/products/idea#_research_reports Copyright © FraudResourceNet LLC Detection Methods By Company Size
  7. 7. 6/18/2014 7 Copyright © FraudResourceNet LLC Asset Misappropriation Tops The Charts Copyright © FraudResourceNet LLC Vendor Billing Fraud/Corruption Is #1 or #2 No Matter Where You Go
  8. 8. 6/18/2014 8 Copyright © FraudResourceNet LLC Fraud Is It Really Hard  To Find Ask a CPA firm to FIND FRAUD AT YOUR  COMPANY – A Fraud Audit to Find the 6% of  Revenues Lost to Fraud – Will that be cheap or  REALLY expensive? How many people find or research a committed  fraud provided to you daily, weekly, monthly,  quarterly, annually? What if technology could find it for you quarterly  and we or someone else could tell you exactly how  to find it?….but it’s there (on average) at  companies…..  If this were true, why are we not all running back to  our desks now!?  Caveat ‐ Probably will take a few hundred hours at  minimum to research the data and present findings  unless they are “right on top” Copyright © FraudResourceNet LLC Have to Start Somewhere Report Mapping
  9. 9. 6/18/2014 9 Copyright © FraudResourceNet LLC Mapping Data to Scripts Map Your Reports to Your  Data Needs Copyright © FraudResourceNet LLC Clear Data Request Accounts Payable Data Request.doc
  10. 10. 6/18/2014 10 Copyright © FraudResourceNet LLC Sample Data Validation – Accounts Payable Other Questions Copyright © FraudResourceNet LLC Polling Question 1 What comes first in the analytic process? A. Get data B. Run reports C. Identify reports to run D. Deliver reports to client
  11. 11. 6/18/2014 11 Copyright © FraudResourceNet LLC The Overall Fraud Analytic Process Get the Most Useful Data for Analysis General Ledger / Accounts Payable Other? / Use external data sources Develop Fraud Query Viewpoints The 5 Dimensions Brainstorm report ideas Analytically Trend Benford’s Law Statistical averages and simple trending by day, month, day of week Post dated changes Transactional Score Based On the Above Copyright © FraudResourceNet LLC Is Your Organization Working   With Banned Companies? EPLS is the excluded party list service of the U.S. Government as maintained by the GSA WWW.SAM.GOV
  12. 12. 6/18/2014 12 Copyright © FraudResourceNet LLC Is Your Organization  Working With Terrorists? Copyright © FraudResourceNet LLC Are Your Vendors Real? IRS TIN Matching Program Validates U.S. Tax  Identification Numbers Can submit up to 100,000  TIN submissions at a time Make sure all punctuation is  removed See  http://www.irs.gov/taxpro s/ and enter “TIN matching  program” in the search box
  13. 13. 6/18/2014 13 Copyright © FraudResourceNet LLC SSN – Death File Copyright © FraudResourceNet LLC The Overall Fraud Analytic Process Get the Most Useful Data for Analysis General Ledger / Accounts Payable Other? / Use external data sources Develop Fraud Query Viewpoints The 5 Dimensions Brainstorm report ideas Analytically Trend Benford’s Law Statistical averages and simple trending by day, month, day of week Post dated changes Transactional Score Based On the Above
  14. 14. 6/18/2014 14 Copyright © FraudResourceNet LLC Query Viewpoints Copyright © FraudResourceNet LLC Specific Tests Based  on the 5 W’sWho Summarize journal entries by the persons entering to determine if they’re  authorized.  What  Summarize journal entries by account and repetitive extracts (more than 50  instances) and unique account sequences used in the journal entry (based on  the first five debit and credit postings).   Extract nonstandard or manual journal entries (versus a created system such as  an accounts payable ledger posting) for further analysis.  Stratify size of journal entries based on amount (using the debit side of the  transaction).  Summarize general ledger activity on the amount field (absolute value of debit  or credit) to identify the top occurring amounts. Then summarize activity by  account and the amount identified for the top 25 appearing amounts.  Scatter‐graph general ledger account (debit and credit amounts separately)  and numbers of transactions.
  15. 15. 6/18/2014 15 Copyright © FraudResourceNet LLC When  Extract journal entries posted on weekends and holidays.   Extract journal entries relating to the prior year that were made just  immediately following a fiscal‐year end.  Summarize journal entry credits and debits processing by day, month, and  year. Where  Extract journal entries made to suspense accounts and summarize by the  person entering and corresponding account numbers.  Extract journal entries to general ledger accounts known to be problems or  complex based on past issues (errors of accounting in journal subsequently  corrected by accounting staff or auditors) at the company or the industry in  general.  Extract debits in revenue and summarize by general ledger account.  Summarize journal entries by the persons entering to determine if they’re authorized.  Specific Tests Based  on the 5 W’s (Continued) Copyright © FraudResourceNet LLC Why  Extract general ledger transaction amounts (debit or credit) that  exceed the average amounts for that general ledger account by a  specified percentage. (Five times the average is the default.)   Extract journal entries that equate to round multiples of 10,000,  100,000, and 1,000,000.  Extract journal entries with key texts such as “plug” and “net to zero”  anywhere in the record.  Extract journal entries that are made below set accounting  department approval limits especially multiple entries of amounts  below such limits.  Extract journal entries that don’t net to zero (debits less credits). Specific Tests Based  on the 5 W’s (Continued)
  16. 16. 6/18/2014 16 Copyright © FraudResourceNet LLC Report Brainstorm Tool Copyright © FraudResourceNet LLC Proactively Detecting Fraud Using Computer Audit Reports IIA Research Paper / CPE Course See the IIA’s website at www.theiia.org The purpose of this document is to assist auditors, fraud examiners, and management in implementing data analysis routines for improved fraud prevention and detection. A comprehensive checklist of data analysis reports that are associated with each occupational fraud category per the Association of Certified Fraud Examiner’s classification system.
  17. 17. 6/18/2014 17 Copyright © FraudResourceNet LLC Payroll Fraud Report Ideas Copyright © FraudResourceNet LLC Top Reports in Payroll  Duplicate employee payments  Payments to the same bank account  and a different employee number  Overtime trending by department and  person (% of overtime to gross pay,  average overtime by department)  Match employee data from the human  resource to the payroll system  Look for inaccurate or incomplete  employee data
  18. 18. 6/18/2014 18 Copyright © FraudResourceNet LLC Other T&E Reports  Unmatched query of cardholders to an active employee  masterfile  Cards used in multiple states (more than 2) in the same day  Cards processing in multiple currencies (more than 2) in the  same day  Identify cards that have not had activity in the last six months  Cardholders that have more than one card   Extract any cash back credits processed through the card  Extract declined card transactions and determine if they are  frequent for certain cards  Summary of card usage by merchant to find newly added  merchants and most active Copyright © FraudResourceNet LLC T&E ‐ It’s The Trends…Right?  Trend categories (meals, hotel,  airfare, other)  Trend by person and title  Trend departments  Trend vendors  Trend in the type of receipts  Trend under limits (company policy) 36
  19. 19. 6/18/2014 19 Copyright © FraudResourceNet LLC Other Data Mining Ideas Personnel Analysis  Adjustments by employee  Processing by employee Contextual Summarizations  Transaction types Time Trending  Month, week, and day / Also by department  Last month to first 11 months   Transactions at the end of and start of a fiscal year Copyright © FraudResourceNet LLC Polling Question 2 What is not one of the query viewpoints? A. Who B. What C. How D. When
  20. 20. 6/18/2014 20 Copyright © FraudResourceNet LLC Adding the Analysis  Toolpak Add‐In Copyright © FraudResourceNet LLC Above Average / Standard  Deviation
  21. 21. 6/18/2014 21 Copyright © FraudResourceNet LLC Stratify Data in Excel or with  ActiveData for ExcelTM Use Excel Vlookup = TRUE Use ActiveData for ExcelTM Copyright © FraudResourceNet LLC How Fraud Grows Over Time 42
  22. 22. 6/18/2014 22 Copyright © FraudResourceNet LLC Scatter Graph Copyright © FraudResourceNet LLC Scatter Graph Explanation 1 – high dollar change and low count (outliers) 2 – charges that make sense 3 – changes that don’t make sense 4 – inefficiency that is developing
  23. 23. 6/18/2014 23 Copyright © FraudResourceNet LLC Polling Question 3 Where do you find the Descriptive Statistics in  Excel? A. Excel Option B. Data Menu C. Excel Add‐Ins D. Insert Menu Copyright © FraudResourceNet LLC Unique Journal Entry Test Account Sequencing The Sampson Index
  24. 24. 6/18/2014 24 Copyright © FraudResourceNet LLC Normalize and test general ledger data consistently on all locations  Most internal audit shops obtain general ledger data quarterly for their external  auditors anyway – no excuse G/L data is the lifeblood of the organization  It is the first data set with enough detail to effectively comb through  Planning will improve as focus can be placed on key accounts, entries, timeframes,  enterers, etc. and will guide future data extracts  Most systems post in detail (even down to inventory movements) which can allow  detailed review of subledgers….using G/L data Identify savings, better ideas,…and fraud  Fraud has been the focus and we should still test for it  Savings in cost recoveries can now become more of a focus  Better ideas leveraged through technology  Efficiency (to help a faster close)  Revenue and business enhancement  Key Mantras of G/L  Analytic Auditing Copyright © FraudResourceNet LLC Polling Question 4 What ActiveData for Excel function allows for the development of the account sequence: A.Summarize B.Stratify C.Merge D.Top / Bottom Items
  25. 25. 6/18/2014 25 Copyright © FraudResourceNet LLC Simple Fraud Vendor Scoring Analysis – How It Started  Vendors on report 1 vs. report 2 of duplicate payments.  Duplicate transactions paid on different checks.  Duplicate transactions with debit amounts in the vendor  account.  Vendors with a high proportion of round dollar payments.  Invoices that are exactly 10x, 100x or 1000x larger than  another invoice.  Payments to any vendor that exceed the twelve month  average payments to that vendor by a specified percentage  (i.e., 200%) or 3x the standard deviation for that vendor.  Vendors paid with a high proportion of manual checks. 49 Copyright © FraudResourceNet LLC The Sampling “Problem”  Bottom Line Numbers  Modern tests (round numbers, duplicates, missing fields)  identify thousands of ‘suspicious’ transactions, usually about 1 in  5 of all transactions get a ‘red flag’  Historically at least 0.02 – 0.03 % of all transactions have real  problems, such as a recoverable over‐payment  So roughly 0.00025 / 0.2 = 0.00125 or 1 in 800 ‘red flags’ lead to a  real problem. Imagine throwing a random dart at 800 balloons hoping to hit  the right one!!!
  26. 26. 6/18/2014 26 Copyright © FraudResourceNet LLC Transactional Score  Benefits The best sample items (to meet your attributes) are  selected based on the severity given to each attribute.   In other words, errors, as you define them, can be  mathematically calculated. Instead of selecting samples from reports, transactions  that meet multiple report attributes are selected (kill  more birds with one stone).  Therefore a 50 unit sample  can efficiently audit:  38 duplicate payments  22 round invoices  18 in sequence invoices ….and they are the best given they are  mathematically the most “severe”. 51 Copyright © FraudResourceNet LLC Pick Items Rare in  Several Ways  Don’t choose just ANY weekend invoice  Choose an UNUSUAL weekend invoice  Large weekend invoices are the rarest kind (i.e.,  only 2 percent of large invoices)  The odds of finding a recoverable error go up  AND since the invoice is large, the value  recovered goes up too!
  27. 27. 6/18/2014 27 Copyright © FraudResourceNet LLC Summaries on  Various Perspectives 53 Summarize by  dimensions (and sub  dimension) to pinpoint  within the cube the  crossover between the top  scored location, time, and  place of fraud based on  the combined judgmental  and statistical score ALL TIES BACK TO THE  ORIGINAL ANALYTIC  APPROACH  Copyright © FraudResourceNet LLC Key Control Reports  & Scoring
  28. 28. 6/18/2014 28 Copyright © FraudResourceNet LLC Combining the Scores ACL Code Copyright © FraudResourceNet LLC Using Vlookup to  Combine Scores Create a record number Relate sheets based on VLookup
  29. 29. 6/18/2014 29 Copyright © FraudResourceNet LLC Charting the Score Copyright © FraudResourceNet LLC Transactional Score  Benefit Patterns Example 58
  30. 30. 6/18/2014 30 Copyright © FraudResourceNet LLC GeoMapping ‐ Map Point Copyright © FraudResourceNet LLC Polling Question 5 What graph is used to map value to score for easier  selections of data subsets? A. Pie B. Line C. Bar D. Scatter
  31. 31. 6/18/2014 31 Copyright © FraudResourceNet LLC Free Excel Directory Tool  Collects all file information by folder  Provides additional information on the  files  Be careful – Can take 30 minutes to run  an entire harddrive  Useful to identify files accessed recently  Great for backups and cleanups of HDs Copyright © FraudResourceNet LLC Questions? Any Questions? Don’t be Shy!
  32. 32. 6/18/2014 32 Copyright © FraudResourceNet LLC Coming Up Next Month 1. Think Like a Fraudster to Catch  a  Fraudster July 9, 2014, 1:00 PM 2. Secrets of Finding Fraudulent  Documentation, July 16, 11:00 AM 3. How to Build Fraud‐Focused Data  Analytics Into Your Audit & Risk  Assessment , July 23, 11:00 AM Copyright © FraudResourceNet LLC The best information newsletter  on fraud and white collar crime is  now available for free! Sign Up Now Please share with your network! WCC Fighter News ‐ Free
  33. 33. 6/18/2014 33 Copyright © FraudResourceNet LLC AuditSoftwareVideos.com Now Free! Videos accessible for FREE subscriptions Repeat video and text instruction as much as you need Sample files, scripts, and macros in ACL™, Excel™, etc.  available for purchase Bite-size video format (3 to 10 minutes) >> Professionally produced videos by  instructors with over 20 years  experience in ACL™, Excel™ , and  more  Copyright © FraudResourceNet LLC 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 Rich Lanza Cash Recovery Partners, LLC Phone: 973‐729‐3944 rich@richlanza.com