Using Data Analytics to Detect and Prevent Corporate and P-Card Fraud

Using Data Analytics to
Detect & Prevent Corporate
and P-Card Fraud
November 20, 2013
Special Guest Presenter:
Rich Lanza

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 (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


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

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5

Today’s Agenda
 Management override: What it is and how it’s most often
done
 Recap of major corporate and P-card fraud schemes
 How to gather the data you need to audit for card fraud
using data analytics
 Best practices in data analytic for corporate and P-card
fraud detection
 Proven P-card fraud deterrence and prevention practices
 P-card-related travel & entertainment fraud detection using
data analytics


Key Considerations Before
Entering Pcard and T&E Reviews
 Is 3% to 5% savings in T&E worth the controls?
It probably won’t be enough of an issue for SarbOx
It DOES make for an embarrassing paper headline

 98% of people are honest…Do you want to
hound them for the 2%?
 Is T&E a company benefit?
 Will you be able to take on the executives?

Asset Misappropriation
Tops The Charts


Risk Assessment Departmental
Focus


9

Top Fraud Schemes By
Department


Making $20K Extra This Year
(assume 20 trips a year)








Meals ($30 a day * 4 days * 20 trips) = $2,400
Gas/Mileage ($20 per trip * 20 trips) = $400
Airline ($100 per trip * 20 trips) = $2,000
Hotel ($10 per day * 4 days * 20 trips) = $800
Entertainment ($50 per trip * 20 trips) = $1,000
Other ($50 per trip * 20 trips) = $1,000
Airline/Other miles for free tickets = $7,000

Total of $14,600 after tax or $20,000 before tax


Playing The T&E Game Can Be
Addictive
 The extra cash always helps
 It’s tax-free!
 The “getting back” at the company
feeling
 Managers never check anyway
 What are they going to do…fire me
over $20?
 The slippery slope to go for more


Polling Question 1

What is not one of the top occurring frauds
per the ACFE study?
A.
B.
C.
D.

Billing
Corruption
Overstated Revenue
Expense Reimbursements


What to Look for and Best Practices in
P-Card and T&E Fraud Detection

P-Card Process Steps










Create/Issue Cards
Maintain Cards
Cancel Cards
Approve Merchants / Merchant Codes
Block Merchants / Merchant Codes
Set Approval Limits / Policies of Use
Initiate Transactions
Validate Transactions
Approve Transactions

The Controls Summary









Whistleblower Hotline
Code of Conduct
Employee Training
Review the Data
Book It For Them
Automated Workflow
Deal With the Fraudsters


Set the Baseline
 Establish set of core values
 Communicate them
 Train people in them
 Give people examples
 So they understand in practical terms when they
break the code


Other Fraud Policy Categories
 Definitions of misconduct and dishonesty
 Organizational policy and responsibilities regarding
reporting suspected misconduct.
 Deterrence and detection responsibilities of individuals
with supervisory or review responsibility.
 Policy specifying the responsibility and authority related to
the investigation of incidents of misconduct and
dishonesty.
 General procedures for the follow up and investigation of
reported incidents.
 Note that questions or other clarifications of the fraud
policy should be addressed to the corporation’s Chief
Counsel.

P-Card Policy Considerations
 Who can have the card / Who cannot have the card (former
employees, non-employees, agents/students/vendors)
 Reconciliation procedures
 What can and cannot be purchased with the card
 Restricting use to organizational business needs
 How to get the card
 How to handle exceptions and irregularities
 How a card can and should be deactivated
 How to get help
 Cardholder agreements
 Rights and responsibilities of the cardholder, department manager
responsible for managing card usage, department manager,
organization and card-issuer

Train the Frontline Troops
 Explain the basics of fraud
 How it starts
 How it grows fast
 Red flag signs

 Explain what to do if they sense it
 Make it fun
 Case studies using past or fictional examples


The Basic Tests
 Review the business purpose of each expense
for reasonableness.
 Validate expenses with proper receipts (when
applicable).
 Recalculate the total reimbursable amount to
test accuracy.
 Review each report for proper approval
 Trace and agree the total reimbursable amount
on the T&E report to the disbursement(s).


Types of T&E Fraud
(in order of occurrence per
ACFE Study Report to the Nations - 2006)

 Mischaracterized – personal expenses that are
submitted as business.

 Overstated – inappropriate overstatement of
submitted expenses.

 Fictitious Receipt – phony receipt used as
support.

 Over-purchase – purchase more than needed
and keep the rest.

 Collusion – manager and employee scheme
against the company

Polling Question 2

What is not one of the top occurring frauds
per the ACFE study?
A.
B.
C.
D.

Billing
Corruption
Overstated Revenue
Expense Reimbursements


Little More Advanced Tests
 Submit altered claims for legitimate expenses that are
larger than actuals, pocket difference in cash
 Create fictitious vendor to vouch for purchases
 Use a “Square” to become a vendor yourself
 Change the vendor’s name between the P-Card and T&E system

 Avoid approval limits by splitting purchases
 Organize legitimate expenses to secure a cash discount
or other benefit from vendor that should go to the
employer
 Submit same expense to multiple authorities or multiple
general ledger accounts

Airline Schemes and Tests

 Book a personal trip as a business one:
Match dates of travel to airline dates

 Book an expensive refundable ticket and
a cheaper ticket, cancel the refundable
ticket, and then submit it for payment
Obtain payment receipt (i.e., Visa bill for the
month) and airline support
See How To Pad Your Expense Report…..and
Get Away With It by Employee X

Airline Schemes and Tests

 Edit the E-mail on an E-Ticket
month) and airline support

 Use one airline to get mileage points
(even if not the best)
Get a general sense of flight costs and
airlines for key company locations

Hotel Schemes and Tests

 Scan invoice and increase amounts
 Get extra invoice paper from hotel and
type phony bill
 Complain to reverse charges and submit
the original invoice
 Ask for a discount (i.e., AAA) after the bill
is printed
month) and hotel support

Meal Schemes and Tests

 Buy tear off receipts at office supply store
and submit phony receipts
 Eat cheap meals or have someone else
pay for them and then submit thrown
away receipts
Check dates are within travel period
month) and hotel support

Taxi / Mileage

 Put through phony taxi receipt and have
someone drive you to the airport
month)

 Add more mileage to the mileage
allowance
Get a general sense of mileage between
company locations or use Mapquest

Polling Question 3

Which of the following are key to the P-Card
fraud control framework?
A.
B.
C.
D.
E.

Employee Training
Review the Data
Book It For Them
Automated Workflow
All of the above


Book It For Them
 Travel agency to process
hotel, car, and air
 Use a car service
 Ensure that payment is made
by company to the vendor
directly


Benefits of Automation:









Enforce company financial policy
Established system of approvals
Increased visibility
Sound internal controls
Heightened accountability
Reduced audit fees
Peace of mind

Have a Response Team
 Have an incident response program
 Set the investigation plan
 Set accountabilities

 Do appropriate marketing
Put everyone on notice that a team exists and is
ready to investigate as needed
 Communicate wrongdoing through company
newsletters even if it is done at a departmental level


Ways To Deal With Fraudsters
 Terminate
 Make an example of
those who get caught
 Put fraud on their W-2
 Remember it is better to
prevent and deter than try to
reclaim later


Integrating Data Analytics Into the
P-Card Review Process

Step #1 in Automation Plan:
Aggregate the Data
 You can improve what you measure
 Summary data (at the invoice level) is not
enough for auditing
 Detail data
Doesn’t have to be an automated system (although
one helps)

Can be done in Excel/Access to get started


Data Tables and Fields – P-Card
Cardholder:
Card Number
Cardholder Address
City
Post Code
Limit

MCC Description:
MCC
MCC Description

Transactions:
Name
Card Number
Merchant
Merchant City
Merchant State
Merchant Cntry
Merchant PostCode
MCC
Amount
Curr ency
Post Date
Trans Date


Data Tables and Fields
T&E Considerations
 Business Purpose
 Who Entertained
 Flight Information (from Travel Company)
Days before the flight booking made
Type of airline and ticket


The Data Aggregators
 Online T&E system
 Travel company / Car Service
company
 Vendor System (i.e., Office
Supplies)
 Procurement card
 Access database / Excel
spreadsheet


The Overall Fraud
Analytic Process
 Get the Most Useful Data for Analysis
 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

 Use Visualization Techniques

Polling Question 4

What is not one of the key tables for P-Card
analysis?
A.
B.
C.
D.

Cardholder
Travel Information
MCC Code Description
Transactions


Our Viewpoints or
Data Dimensions


Top Reports






Unmatched query of cardholders to an active employee masterfile
Cards used in multiple states in the same day
Cards processing in multiple currencies in the same day
Identify cards that have not had activity in the last six months
Cardholders that have more than one card (Duplicates on card
holder)
 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


Top Reports (continued)
 Duplicates on card number, amount, and transaction date
 Duplicates on merchant, amount, and transaction date
(regardless of card)
 Duplicates on merchant and amount
 Duplicates on cardholder and amount
 A multitude of transactions under the card purchase limit or
MCC amount limit to identify split purchases on the card to
purchase higher amount items using multiple charges.
 Postings to unusual MCC codes
 Align the Pcard to T&E system to ensure merchant and
amounts line up for each transactions


It’s The Trends….Right?









Trend categories (meals, hotel, airfare, other)
Trend mileage
Trend departments
Trend in the type of receipts
Trend under limits (company policy)
Trend by person
By location
By vendor


Stratify Data - Results


Scatter Data


Scatter Graph


Map of the Vendor Population


49

Benford’s Law Continuous View
Quarterly law

0.3500
0.3000
0.2500
4th
3rd
2nd

0.1500

1st

0.1000
0.0500

95

90

85

80

75

70

65

60

55

50

45

40

35

30

25

20

15

0.0000

10

Frequency

Benford

0.2000

Digits


Deeper into Benford’s


Invoices Near The Approval
Limit


Polling Question 5

What is probably the best Excel feature for
reviewing Pcard and T&E data?
A.
B.
C.
D.

Scatter Graphs
Pivot Tables
Vlookup
Data Analysis Toolkit


T&E Scoring Analysis
(Using Macros)
1.
2.
3.

4.

Employees with low transaction, high dollar activity - 20
Employees with a high proportion of round dollar
payments. - 25
Payments to any employees that exceed the twelve
month average payments to that employee by a specified
percentage (i.e., 200%) or 3x the standard deviation for
that vendor. - 20
Employees with a high proportion of charges near
approval limits - 35


Transactional Score Benefits
 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”.
 Sampling can be based on quadrants
which takes into account different
severity, volume, and value dimensions


55

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


Coming Up Next Month

 How to Use Data Analysis to
Detect Revenue and Receivables
Fraud, Dec.12th
 Integrating Data Analytics for
Fraud Into Your Audit Dec. 17th
 Internal Anti-Fraud Controls:
Attaining Long-Term
Effectiveness Dec 18th


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

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