Uncovering Fraud in Key Financial Accounts using Data Analysis

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.

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


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
Auditchannel.tv


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5

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


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


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?


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


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.


Polling Question 1
Most auditors will never detect fraud
in the organization of employment
in their lifetime:
A. True
B. False


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”


Proactive Anti‐Fraud Program


Creating a Continuous
Auditing Application

Source: July 2011 ISACA


Why Internal Auditing Matters


Audit Life Cycle


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

Cutoff

Classify

Disclosure

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


Data Analysis Process


Data Analysis Top Challenges

CFO 2012


Governance – Data Access


Rules for Auditors to Follow
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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


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


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


Where to Look

Read the local
newspaper, trade
magazines, web blogs,
etc. Could it happen
here?


Where to Look – “Tips”

Is your “door” open?

ACFE RTTN

“Squirrel” File Notebook


Where to Look

ACFE RTTN


Where to Look

ACFE RTTN


Understand what Fraud looks
like in your organization

ACFE RTTN


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


Request - Use Existing Tools


Indicate Appropriate System(s)


Complete Form


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.


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


Journal Entry Tests

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Nonbalancing JE
Missing JE’s
Unusually large line item entries
JE posted on a specific date, time, or
week day


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


Additional JE Tests
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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


Accounts Receivable Tests

 Customers Exceeding
Credit Limit
 Aging of open receivables
 Unresolved Credit
Balances


Additional AR Tests
 Debtors transaction summary
 Transactions around a certain date
 Duplicate Field Search


Accounts Payable Tests

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Duplicate Detection
Aging Function
Determine the pay date from set up date
Employees in Vendor Master File
Travel and Entertainment
False entries in AP


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

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


Inventory Tests

 Re-computation of Cost of Items
 Isolating Large Inventory Items
 Searching for Zero or Negative Unit
Costs


Additional Tests Inventory
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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


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


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


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!


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
Don Sparks
dons@audimation.com
832-327-1877


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
http://bit.ly/151WI1s


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