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Fraud Detection and Prevention through Data Analysis
Presented by: Greg Taylor, CFE
Senior Vice President/CTO Corporate Audit Partners
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Agenda
Introduction
Defalcation Statistics
Case Studies
Fictitious Invoices
Duplicate Payments
Budget Manipulation
Prevention and Detection
Dry Run Test Consecutive Invoice Numbering Non-Sequential Invoice Numbers Vendor Histogram PO Box Only Addresses Address Analysis Bank Code Analysis Benford's Law Number Duplication
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Introduction Greg Taylor
27 years of accounting and auditing
Industries
Banking
Aerospace
Advertising
Owned Forensic Accounting Business
17th year in the recovery auditing industry
Published author – Please review Corporate Audit Partners website www.corporateaudits.com to
review some articles. “Why Employees Steal” and “Fraud Basics, The Perils of a Small Business”.
White paper – University of Arizona, Eller College of Management, “How to Lose $1.8 Billion in One
Week - Seven Ways to Protect Your Information from Security Loss”
http://iasec.eller.arizona.edu/white_papers/index.asp
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Occupational Fraud Statistics
Association of Certified Fraud Examiners 2010 Report
1,843 cases totaling approximately $1 billion in losses
Est. typical U.S. organizations loses 5% of revenue to fraud
Confidential Reporting mechanisms reduce fraud losses by 50% (tip line)
Fraud losses are disproportionably large in small business
80% of Frauds were committed in one of six departments; accounting,
operations, sales, executive management, customer service, purchasing
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
The What
Defalcation last typically 16 months
Fraudulent disbursements make up 64% of cases reviewed
60% of Occupational Fraud loss at least $100,000
Companies with less than 100 employees make up 30.8% the cases
Companies with 1,000 – 9,999 employees make up 25.9% of cases
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
The Why
The Four “D’s” Debt and Gambling
Drug and Alcohol Abuse
Divorce and Marital Problems
Disgruntled Employee
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
The Who
Typical Embezzler Management or supervisor position
7 years plus with company
Annual Income $100,000 - $149,000
Male 66.7%
Female 33.3%
Age 19.3% are 36 – 40, 19.3%, 41-50
Bachelors Degree 52%
First Time Offender
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Detection Association of Certified Fraud Examiners
2004 Report to the Nation on Occupational Fraud and Abuse
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Cash Misappropriation
Fraudulent Disbursements – Perpetrator causes company to disburse funds by device or trick – Example: False invoices, forged company check
Skimming - Cash is stolen before been booked
Cash Larceny – Cash is stolen after been booked
2/3rd of all cash frauds were Fraudulent disbursements
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Case Study 1
Fictitious Invoice Employee in Department works with Vendor
Vendor creates invoice
Employee approves invoice and submits to AP
AP pays invoice for products or services not received
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Case Study 2
Duplicate Payment AP Employee creates fictitious invoice using original invoice
documentation
Check is cut to Vendor
AP Employee calls vendor and informs them of the duplicate payment
AP Employee suggests that a refund check be cut per his or her attention or made out to another name
AP Employee receives refund check and pockets the cash
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Case Study 3
Budget Manipulation Department Head contacts Vendor and suggests a pre-payment to
vendor
Vendor sends invoice to Company
Transaction number is noted as a quote number rather than an invoice number
Pre-payment check is cut to vendor
Department expenses are misstated
Department uses open vendor credit to adhere to budget
Department receives bonuses on adherence to budget
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Dry Run Test
This test identifies vendors or suppliers with large average invoice dollar values that have a very low minimum invoice value
The purpose of this test is to isolate invoices that are for a very low dollar amount compared to the average. This can help to identify if vendor/supplier is being used to test internal controls in the accounting system
Suggested review of even dollar invoices such as ($1.00, $5.00, $10.00, $20.00….)
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Dry Run Test - Results
Item No. Vendor Number Vendor Name Average Invoice Amount First Invoice Amount Dry Run Test Percentage1 723143234 OBAYASHI CORPORATION $563,712.13 $1,039.47 0.18%2 306142033 DELL COMPUTER CORP $39,268.33 $93.00 0.24%3 326114242 SODEXHO MARRIOTT CORPORATION $5,168.15 $17.76 0.34%4 101091156 RF MACDONALD COMPANY $8,733.35 $52.24 0.60%5 420101954 CELESTICA CORP. $22,369.95 $190.00 0.85%6 327071713 SOCIETY FOR INFO. DISPLAY $7,597.50 $75.00 0.99%7 101041067 P G & E $10,337.60 $105.80 1.02%8 B04132909 ROPERS, MAJESKI, KOHN&BENTLEY $7,460.67 $90.00 1.21%9 C01141001 HEWLETT PACKARD COMPANY $9,213.66 $112.58 1.22%10 611145017 SHINKO AMERICA INCORPORATED $15,595.70 $233.73 1.50%11 902094321 DURR ENVIRONMENTAL INCORPORATED $6,093.45 $105.34 1.73%12 101091451 PRAXAIR INCORPORATED $17,107.90 $321.75 1.88%13 330102517 EBARA TECHNOLOGIES INCORPORATED $18,607.67 $372.72 2.00%14 331110258 COLLIERS HOUSTON & CO.PROPERT $5,170.14 $107.27 2.07%15 A05094025 ORACLE CORPORATION $36,485.84 $880.00 2.41%
74 101041424 TOPPAN ELECTRONICS INC $31,016.11 $4,170.00 13.44%75 125085409 TECHNICAL INSTRUMENT SAN FRANCISCO $6,229.18 $845.57 13.57%76 911145522 SMI ELECTRONIC DEVICES AMERICA INC $25,950.20 $3,803.09 14.66%77 0000000144 Dense Pac $9,772.92 $1,461.65 14.96%78 101091169 RAY L HELLWIG PLUMBING & HEATING COMPANY $8,591.34 $1,310.00 15.25%79 815103903 JEOL USA INCORPORATED $9,656.70 $1,491.70 15.45%80 0000000299 ALLIED SECURITY $8,574.86 $1,388.80 16.20%
Client: xyz Company - Report XIDry Run Test
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Consecutive Invoice Numbering
This test identifies vendor/suppliers with consecutive invoice numbering
The purpose of this test is two fold 1. Test can be used to identify misappropriations of funds by employee using
consecutive invoice numbers
2. Test can also be used as a risk management tool to identify vendors or suppliers where your company is their only source of income. You can create appropriate alternatives if the vendor or supplier goes out of business
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Consecutive Invoice Numbering - Results
IDInvoice Number
Invoice Date Invoice Amount PO ID
Vendor Number Vendor Name Address 1 Address 2 City State
Postal Code
Check Number
Check Date
31104 126012607 12/06/03 $11,615.49 6602 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311532 01/17/0431105 126012608 12/07/03 $154.69 6602 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311532 01/17/0431106 126012609 12/07/03 $24,012.94 6602 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311532 01/17/0431107 126012610 12/07/03 $153.93 6602 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311532 01/17/0431108 126012611 12/05/03 $45,563.01 6602 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311532 01/17/0431109 126012612 12/05/03 $153.93 6602 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311532 01/17/0431139 126015480 01/16/04 $5,233.59 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/0431140 126015481 01/16/04 $769.65 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/0431141 126015482 01/16/04 $3,540.37 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/0431142 126015483 01/16/04 $1,693.22 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/0431143 126015484 01/16/04 $3,386.44 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/0431144 126015485 01/16/04 $593.82 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/0431145 126015486 01/16/04 $928.17 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/0431146 126015487 01/16/04 $618.78 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/0431147 126015488 01/16/04 $8,662.90 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/0475541 507600 06/29/03 $2,861.43 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/0375542 507601 06/29/03 $504.60 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/0375543 507602 06/29/03 $963.09 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/0375544 507603 06/29/03 $456.75 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/0375545 507604 06/29/03 $124.41 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/0375546 507605 06/29/03 $287.10 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/0375547 507606 06/29/03 $12.92 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/0375548 507607 06/29/03 $30.45 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/0382364 602104/0100 01/01/03 $3,384.17 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305826 04/03/0382365 602104/0200 02/01/03 $3,178.06 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305826 04/03/0382366 602104/0300 03/01/03 $2,670.82 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305826 04/03/0382367 602104/0400 04/01/03 $3,404.77 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305826 04/03/0382368 602104/0500 05/01/03 $3,184.09 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305836 07/03/0382369 602104/0600 06/01/03 $3,053.95 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305836 07/03/0382370 602104/0700 07/01/03 $2,996.78 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305836 07/03/0382371 602104/0800 08/01/03 $3,498.83 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305842 09/03/0382372 602104/0900 09/01/03 $3,350.58 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305842 09/03/0382373 602104/1000 10/01/03 $1,986.51 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305856 12/03/03
Client: xyz Company - Report XIIVendors / Consecutive Invoice Numbering
Prepared by: Corporate Audit Partners
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Non-Sequential Invoice Numbering
This test identifies invoices out of character sequence.
Most vendors or suppliers use the same sequence of alpha numeric character
By isolating characters out of sequence the company may be able to identify defalcation, budget manipulation or wrong vendor payment
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Non-Sequential Invoice Numbering - Results
Report IX
Vendor NumberVendor
Number Vendor Name Invoice Number Invoice Date Invoice Amount Invoice ID
52519 1223 A1CUST 1563 04/10/02 $200.00 53953452520 1223 A1CUST 1564 04/10/02 $360.00 53953658197 1223 A1CUST 1568 08/02/02 $1,000.00 55566656446 1223 A1CUST 1570 06/26/02 $654.75 55087259588 1223 A1CUST 1571 08/30/02 $600.00 559603
103605 1223 A1CUST 1572 08/06/03 $100.00 60538263084 1223 A1CUST 1580 10/30/02 $162.50 56822497639 1223 A1CUST 1585 04/09/03 $1,000.00 58929897640 1223 A1CUST 1586 04/09/03 $80.00 589300
129070 4974 A1FAST 21-OCT-03 10/21/03 $250.00 616470
8151 1213 LBHCHEM 0021365-in 07/11/01 $219.94 5030483396 1213 LBHCHEM 0029615-in 03/20/02 $405.66 536166
53248 1213 LBHCHEM 0030882-IN 04/24/02 $90.50 54155054229 1213 LBHCHEM 0031641-in 05/17/02 $408.84 544417
102468 1213 LBHCHEM 0044698-IN 07/16/03 $554.19 602189102868 1213 LBHCHEM 0044888-IN 07/23/03 $1,150.61 603148104705 1213 LBHCHEM 0045863-IN 08/27/03 $348.89 60829448039 1213 LBHCHEM 0039276 01/15/03 $539.59 57856748040 1213 LBHCHEM 0039277 01/15/03 $540.00 578579
74486 3499 WILLIAM4 CA37239 03/10/03 $92.23 58541074484 3499 WILLIAM4 CA37239 03/10/03 $92.23 58541074483 3499 WILLIAM4 CA37239 03/10/03 $92.23 58541074482 3499 WILLIAM4 CA37239 03/10/03 $92.23 58541074485 3499 WILLIAM4 CA37239 03/10/03 $92.23 58541032454 3499 WILLIAM4 HP648C PRINTER 08/27/01 $127.59 50984773398 3499 WILLIAM4 JANUARY 31, 2003 02/03/03 $94.75 58165278133 3499 WILLIAM4 PC52202 05/23/02 $80.77 546506
122306 3499 WILLIAM4 PLT 72 09/29/03 $511.43 61345086061 3499 WILLIAM4 TN 11/02 11/08/02 $453.58 57076172854 3499 WILLIAM4 WA/PA/MO 01/16/03 $495.76 579455
Client XYZNon-Sequential Invoice Numbers
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Vendor Histogram
This test identifies Vendor payment trends during a given time period
Most vendors or suppliers have similar transaction cycles or transaction amounts
Unusual or significant increases in either the frequency or value of transactions can signify defalcation or collusion
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Vendor Histogram
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Vendors Scatter Graph
This test identifies all Vendor payment trends during a given time period and maps anomalies
Horizontal analysis of year over year or period over period
Most vendors or suppliers have similar transaction cycles or transaction amounts
Unusual or significant increases in either the frequency or value of transactions can signify defalcation, collusion, or growing inefficiencies.
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Vendor Scatter Graph
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
P.O. Box Only Addresses
This test identifies vendors or supplies that only have PO Box address
The purpose of this test is to identify vendors that have no physical address
All vendors or suppliers should have a physical address listed in the
vendor master file
The lack of a physical address may be an indication that a vendor has been set up fictitiously in the vendor master file.
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
P.O. Box Only Address - Results Vendor Master Report IV
Vendor Number Vendor Name Address1 City State Country Zip
4064 ABF FREIGHT SYSTEM, INC. PO BOX 142088 AUSTIN TX US 78714-2088
6849 ACCENT FLOORING, INC. PO BOX 19015 AUSTIN TX US 78760
9905 ADVANCE PLASTIC FABRICATORS PO BOX 5117 ROUND ROCK TX US 78683-5117
7907 AIRGROUP EXPRESS P.O. Box 3627 Bellevue WA US 98009-3627
5184 BAYSHORE PRESS PO BOX 67303 SCOTTS VALLEY CA US 95067-7303
1653 BETZDEARBORN, INC. PO BOX 846046 DALLAS TX US 75284-6046
9928 BGS INCENTIVE ACTIVITIES PO BOX 6044 KAMUELA HI US 96743
10598 CABLE ONE PO BOX 10 CALDWELL ID US 83606
8029 CALIFORNIA TECHNICAL INDUSTRIES PO BOX 66868 SCOTTS VALLEY CA US 95067-6868
11466 DANAHER POWER SOLUTIONS PO BOX 98392 CHICAGO IL US 60693
9821 DAVID RODERICK PO BOX 640295 SAN JOSE CA US 95164-0295
4776 DELTEX, INC. PO BOX 3258 LITTLETON CO US 80161-3258
2528 EESCO/UNITED ELECTRIC CO. PO BOX 91626 CHICAGO IL US 60693
9976 FINZER IMAGING SYSTEMS PO BOX 39082 DENVER CO US 80239-0082
6376 GOMEZ ENERGY SERVICES PO BOX 5082 GEORGETOWN TX US 78627
8455 HARTSTON,INC PO BOX 21941 LEXINGTON KY US 40522-1941
5504 L&L ASSOCIATES P.O. BOX 541 BREA CA US 92822
7065 MEETING SOLUTIONS, INC. PO BOX 4062 AUSTIN TX US 78765-4062
8348 MICRO COMPUTER CONTROL CORP. PO BOX 275 HOPEWELL NJ US 08525
7520 O.C. MCDONALD COMPANY INC. PO BOX 26560 SAN JOSE CA US 95159
9111 PADGETT THOMPSON PO BOX 4725 BUFFALO NY US 14240-4725
8721 PENINSULA VISA & PASSPORT SERVICES PO BOX 28 SANTA CLARA CA US 95052
6847 PIONEER PRESS PO BOX 64890 ST PAUL MN US 55164
2435 PNEUMATICO, INC. PO BOX 410310 MELBOURNE FL US 32941-0310
1891 PURVIS BEARING SERVICES, INC. PO BOX 540757 DALLAS TX US 75354-0757
9135 R&M ELECTRIC INC PO BOX 63479 COLORADO SPRINGS CO US 80962-3479
10365 SEZ AMERICA, INC. PO BOX 29830 PHOENIX AZ US 85038-9830
Box Report - Vendors with PO Box Only Address
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Address Analysis
This test compares vendor addresses to employee addresses
This test can be used to identify employees who have set up fictitious vendors in the vendor master file
There may well be occasions where an employee is also set up as a supplier or vendors but you should be aware of them
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Address Analysis - Results
Address Match
Employee ID
Vendor Number Vendor Name Address 1 Address 2 City State Postal Code
614153317 DOUBLETREE HOTEL SAN JOSE 1050 GATEWAY PLACE SAN JOSE CA 951100000000845 Plotter Pros 1086 The Alameda Suite 100 San Jose CA 95116C11145617 RECOMMENDED RESOURCES 11 AMHERST ROAD AMHERST MA 1001C11145617 RECOMMENDED RESOURCES (INACTIVE) 11 AMHERST ROAD AMHERST MA 1001
MATCH 009985 1336 Hill San Marcos TX 78022MATCH 917150807 S M DESIGNES 1336 HILL St SAN MARCOS TX 78022
711131708 RT CONSTRUCTION 13455 NOEL RD SUITE 430 DALLAS TX 75140615094134 RYDER TRANSPORTATION SERVICES 1481 O'TOOLE AVENUE SAN JOSE CA 95131617143713 MONARCH INSTRUMENT 15 COLUMBIA DRIVE AMHERST NH 03031-1334616094959 MASON WEST INCORPORATED 1840 GRETTO LANE ANAHEIM CA 91806517160003 ADVANCED SYSTEM SOLUTIONS 3115 PERIVALE CT SAN JOSE CA 95148831 Ev ent Connections 3657 El Grande Driv e San Jose CA 95131110 MURAD SALES INCORPORATED 4600 GREENVILLE AVE SU DALLAS TX 75106
MATCH 731143218 G Consulting 5506 CHIMNEY RCK DR IRVING TX 76017MATCH 009511 5506 Chimney Rock Driv e IRVING TX 76017
111 JUNIOR NATIONAL WHEELCHAIR CHAMPIONSHIPS 5730 CHAMBERLIN DRIVE SAN JOSE CA 951180000000510 HANSON PUBLICATIONS 64 CLIFTON AVENUE PO B AN SONIA CT 06401-0514
MATCH 008701 6610 Manzanita Dr. San Marcos TX 78027MATCH A28135104 JS GRAPHICS 6610 MANZANITA DRIVE SAN MARCOS TX 78027
0000000701 INTERNET ASSOCIATION GROUP, INC. 6610 SOUTHPOINT DRIVE SUITE 600 JACKSONVILLE FL 31116MATCH 007901 6701 row Way Laconia CA 05842MATCH 624135327 DYGNETS 6701 ROW WAY LACONIA NH 05842
811 BLACKSTONE - NEY 9 N. MAIN ST JAMESTOWN NY 14701817111810 CAE ULTRACSONICS 9 NORTH MAIN STREET JAMESTOWN NY 14701-0110101090844 LAB SAFETY SUPPLY INCORPORATED DEPT #0000185191 PO BOX 5004 JANESVILLE WI 53547-5004909111811 SPECIALIZED PRODUCTS COMPANY PO BOX 890006 DALLAS TX 75389-0006101090036 LAIRD PLASTICS PO BOX 951111 DALLAS TX 75395516165940 RW/STEARNS RIVER PARK TOWER 333 W. SAN CARLOS S SAN JOSE CA 95110-1711515091707 IEEE VLSI TEST SYMPOSIUM VLSI Test Sy mposium 1001 Attn: Maddie Harw ood Amissv ille VA 10106
Client: xyz Company - Report VIEmployee Address / Vendors Address Comparison
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Bank Code Analysis
This test identifies instances where a vendor/supplier and an employee have the same bank code number
The test can also identify if multiple employees have the same bank code number
The purpose of this test is to find fictitious vendors or employees
set up in the payroll or vendor master files
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford's Law
P(kx) = f(k)P(x) If fP(x)dx = 1, then fP(kx)dx = 1/k, and
normalization implies f(k) – 1/k. Differentiating with respect to k and settings k = 1 gives
xPⁿ(x) = -P(x)
If you can understand this you are in the wrong workshop!
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law
123456789
$1,000,000 1 $23 2 $542 5 $100 1
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Why does it work!
Functional Dependence
Budget data depends on
Corporation Size
Particular Industry
Quality of Management
State of the Market
Sales growth
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford's Law - History 1881 Simon Newcomb American Astronomer “Notes on the
Frequency of the use of Digits in Natural Numbers”
1938 Dr. Frank Benford Electrical Engineer General Electric “The Law of Anomalous Numbers”
1992 Dr. Mark Nigrini “Detection of Income Tax Evasion Through and Analysis of Digital Frequencies”
1999 Dr. Mark Nigrini “I’ve Got Your Number”
2002 Dr. Mark Nigrini “Using Microsoft Access for Data Analysis and Interrogation” Mark J. Nigrini Ph.D. / Saint Michael's College / http://www.nigrini.com/ Dept of Business and Acctg - Campus box 104 One Winooski Park / Colchester Vermont 05439 Tel: (802) 654-2894 (Saint Michael's office)
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford's Law - First Digit Analysis
0.000000
0.050000
0.100000
0.150000
0.200000
0.250000
0.300000
MFG 1 MFG 2 MFG 3 Benford min max
MFG 1 0.301980 0.173300 0.122330 0.091430 0.082010 0.066050 0.057500 0.054620 0.050770
MFG 2 0.310863 0.173561 0.131462 0.086964 0.080502 0.064560 0.055869 0.049351 0.046868
MFG 3 0.303399 0.171330 0.125069 0.098053 0.085215 0.065212 0.055819 0.050058 0.045845
Benford 0.301030 0.176091 0.124939 0.096910 0.079181 0.066947 0.057992 0.051153 0.045758
min 0.300000 0.166000 0.113000 0.087000 0.069000 0.057000 0.048000 0.041000 0.036000
max 0.320000 0.186000 0.133000 0.107000 0.089000 0.077000 0.068000 0.061000 0.056000
1 2 3 4 5 6 7 8 9
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford's Law - Second Digit Analysis
0.000000
0.020000
0.040000
0.060000
0.080000
0.100000
0.120000
0.140000
0.160000
MFG 1 MFG 2 MFG 3 Benford Min max
MFG 1 0.147670 0.110520 0.108630 0.097790 0.094860 0.101870 0.087940 0.086410 0.081550 0.082760
MFG 2 0.148335 0.100621 0.107054 0.094498 0.093538 0.108916 0.089983 0.089080 0.084424 0.083550
MFG 3 0.142515 0.101389 0.107227 0.096407 0.095376 0.111879 0.091042 0.087048 0.083536 0.083580
Benford 0.119680 0.113890 0.108820 0.104330 0.100310 0.096680 0.093370 0.090350 0.087570 0.085000
Min 0.109680 0.103890 0.098820 0.094330 0.090310 0.086680 0.083370 0.080350 0.077570 0.075000
max 0.129680 0.123890 0.118820 0.114330 0.110310 0.106680 0.103370 0.100350 0.097570 0.095000
0 1 2 3 4 5 6 7 8 9
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Statistics
1st DigitBenford's
Law 2nd DigitBenford's
Law
Benford "CAP
Modified"First Two
DigitsBenford's
LawFirst Two
DigitsBenford's
LawFirst Two
DigitsBenford's
Law1 30.10% 0 12.0% 14.6% 10 4.14% 40 1.07% 70 0.63%2 17.61% 1 11.4% 10.4% 11 3.78% 41 1.05% 71 0.62%3 12.49% 2 10.9% 10.8% 12 3.48% 42 1.02% 72 0.62%4 9.69% 3 10.4% 9.6% 13 3.22% 43 1.00% 73 0.61%5 7.92% 4 10.0% 9.5% 14 3.00% 44 0.98% 74 0.60%6 6.69% 5 9.7% 10.8% 15 2.80% 45 0.95% 75 0.59%7 5.80% 6 9.3% 9.0% 16 2.63% 46 0.93% 76 0.58%8 5.12% 7 9.0% 8.8% 17 2.48% 47 0.91% 77 0.58%9 4.58% 8 8.8% 8.3% 18 2.35% 48 0.90% 78 0.57%
9 8.5% 8.3% 19 2.23% 49 0.88% 79 0.56%20 2.12% 50 0.88% 80 0.55%21 2.02% 51 0.88% 81 0.55%22 1.93% 52 0.86% 82 0.54%23 1.85% 53 0.84% 83 0.53%24 1.77% 54 0.83% 84 0.53%25 1.70% 55 0.81% 85 0.52%26 1.64% 56 0.80% 86 0.51%27 1.58% 57 0.78% 87 0.51%28 1.52% 58 0.77% 88 0.50%29 1.47% 59 0.76% 89 0.50%30 1.42% 60 0.74% 90 0.49%31 1.38% 61 0.73% 91 0.49%32 1.34% 62 0.72% 92 0.49%33 1.30% 63 0.71% 93 0.49%34 1.26% 64 0.69% 94 0.48%35 1.22% 65 0.68% 95 0.47%36 1.19% 66 0.67% 96 0.47%37 1.16% 67 0.66% 97 0.46%38 1.13% 68 0.65% 98 0.46%39 1.10% 69 0.64% 99 0.45%
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Using Access Database
Invoice Transaction Table
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Using Access Database
Raw Invoice Transaction Data
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Using Access Database
Query Object
This is where the data analysis actually occurs
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Using Access Database
Run Query to see results
Query built to strip off left most digit from the invoice amount
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Using Access Database
Invoice Amount
Stripped Left Most Digit
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Using Access Database
Summary Query to Summarize Benford’s Law First Digit results
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Using Access Database
Group By Button
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Using Access Database
Benford’s Law First Digit Results
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Using Access Database
Send analysis to Microsoft Excel Worksheet
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Excel Download
Results downloaded to Excel
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Excel Analysis
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Excel Analysis
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Two-Digit Analysis
Benfords Law Two-Digit Expression
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Two-Digit Analysis
Invoice Amount
Stripped Left Most Digit
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Two-Digit Analysis
Benford’s Law First Two Digit
Results
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Two-Digit Analysis
Findings Frequency
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Benford’s Law - Two-Digit Analysis
Anomalies to review
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Number Duplication Subset Test
The Number Duplication test will tell what specific numbers were causing spikes (positive differences) on the first-two digit test
For each of the number categories we want a table of number frequencies showing:
1. The rank (1,2,3,4,5…..) 2. The frequency (or count), and 3. The number (usually dollars) that was duplicated
The table is usually sorted by frequency descending
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Number Duplication Subset Access Query
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Number Duplication - Test Results
The invoice amount of $315.00 was entered 690 times
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Number Duplication Test - Design View
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Number Duplication - Test by Vendor
Number Duplication Isolated by Vendor
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Conclusion
Data analysis can help to isolate anomalies for further review
The best prevention is constant testing
Please feel free to contact us at any time with questions or comments
Thank you for your participation Greg Taylor / Corporate Audit Partners Phone: 949.488.7648 Ext 829 Email: [email protected] Website: www.corporateaudits.com
Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245 San Juan Capistrano, CA 92675
Reference Material
Mark J. Nigrini Ph.D. / Saint Michael's College / http://www.nigrini.com/ Dept of Business and Acctg - Campus box 104 One Winooski Park / Colchester Vermont 05439 Tel: (802) 654-2894 (Saint Michael's office) Association of Certified Fraud Examiners Inc. / www.CFEnet.com The Gregor Building 716 West Avenue / Austin, TX 78701-2727 Tel: (800) 245-3321
Corporate Audit Partners VRM Partner™ Advanced Software Solutions Phone: 949.488.7648 Ext 829
Email: [email protected] Web: www.corporateaudits.com