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© 2011 Crowe Horwath LLP 2Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Session Agenda
Utilizing data analysis to detect fraud and strengthen internal controls.
Risk assessment process How data analysis can be used in detecting fraudFine-tuning a successful data analytics program The continuous monitoring process
© 2011 Crowe Horwath LLP 3Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Definition of Fraud Webster’s Dictionary: “Deceit, trickery; cheating, intentional deception to
cause a person to give up property or some lawful right.”
AICPA EDP Fraud Review Task Force: “Any intentional act, or series of acts, that is designed to deceive or mislead others and that has an impact or potential impact on an organization’s financial statements.”
The Accountant’s Handbook of Fraud & Commercial Crime: “Fraud is criminal deception intended to financially benefit the deceiver.”
© 2011 Crowe Horwath LLP 4Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Fraud Triangle
© 2011 Crowe Horwath LLP 5Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
PREVENTION
DETECTION
INVESTIGATION
Fraud Triangle
© 2011 Crowe Horwath LLP 6Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
External
Fraud Risk Universe
Board
© 2011 Crowe Horwath LLP 7Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Evolution of Fraud
1950 Straight-line reporting Manual processes Single suppliers Step-up salary structure
2000 Matrix organizations Automation Autonomous authority Multiple vendors Performance-based pay
7
© 2011 Crowe Horwath LLP 8Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Spotting Potential Risks - People
© 2011 Crowe Horwath LLP 9Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Should Fraud Be A Concern?
Of 4,000 high school students with A and B averages, 75 percent admit to cheating to get ahead. Ninety- two percent of those who said they cheated were never caught. - Who’s Who Among American High School Students
Almost 80 percent of college students admit to cheating at least once. - The Center for Academic Integrity
The percentage of resumes and job applications that contain lies and exaggerations has been estimated between 30 and 80 percent. - Security Management Magazine
© 2011 Crowe Horwath LLP 10Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
A Study of White Collar Crime Profiles
10 % of the people will never steal
80 % of the people will steal if given the right motive or pressure
10 % of the people will steal regardless of the circumstances
© 2011 Crowe Horwath LLP 11Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Behavioral Red Flags of Perpetrators
Source: 2010 ACFE Report To The Nation
© 2011 Crowe Horwath LLP 12Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Primary Internal Control Weakness Observed
Source: ACFE 2010 Report To The Nation
© 2011 Crowe Horwath LLP 13Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
The Whistleblower
© 2011 Crowe Horwath LLP 14Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Benefits of Using Data Analytics
Efficiency Increased analytical capacity Variety of output representation Repeatable process
© 2011 Crowe Horwath LLP 15Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Data – Excellent Source of Fraud Evidence
1. Data is objective.
2. Data can be searched and analyzed without arousing suspicion.
3. Data analysis can provide evidence that helps with other areas of the investigation.
4. Provide facts needed to gain confessions during interviews.
© 2011 Crowe Horwath LLP 16Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Data Mining Best Practices
Establish expectations:
• What do I expect to see in the data
• What do I expect not to see in the data
• What do I expect an exception to look like
• What exceptions should I expect
© 2011 Crowe Horwath LLP 17Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Steps to Detect Fraud
Understand the Industry, Business, Unit What Fraud Schemes Could Occur Identify the Red Flags Associated With The Fraud Scheme Test For The Red Flags Resolve Identified Red Flags
© 2011 Crowe Horwath LLP 18Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
A Series of Examples – Total Disbursements
Sort the total payments made to each vendor in descending order.
Vendor Name Disbursement To Date
Fabric Distributors Inc. $1,873,980
Silk Designer Patterns Inc. $1,792,621
Men’s Apparel Option Inc. $1,021,426
Timothy Wineguard $1,004,372
Threads Unlimited LLC $ 981,982
Wool Makers Incorporated $ 942,533
© 2011 Crowe Horwath LLP 19Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
A Series of Examples – Check Disbursements
Vendor ID Vendor Name Disbursement To Date
362862 TAILOR MADE SOLUTIONS $32,975
382868 TAILOR MAIDE SOLUTIONS $35,583
373920 TAILOR MADE SOLUITIONS $59,012
© 2011 Crowe Horwath LLP 20Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
A Series of Examples – Disbursements by Vendor
Know your Alphabet Vendors
Vendor Check Date Check Amount
AT&T 01/03/09 $1,493.43
AT&T 02/02/09 $1,394.99
AT&T 02/05/09 $2,049.63
AT&T 02/23/09 $1,032.88
AT&T 03/02/09 $1,382.21
© 2011 Crowe Horwath LLP 21Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
A Series of Examples – Disbursements by Frequency
Determine if a Vendor is receiving payments more
frequently than expected.
Vendor # of Payments in 12 months
Fabric Distributors Inc. 11
Silk Designer Patterns Inc. 10
Men’s Apparel Option Inc. 11
Timothy Wineguard 43
Threads Unlimited LLC 10
Wool Makers Incorporated 11
© 2011 Crowe Horwath LLP 22Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
A Series of Examples – Duplicates
Identify common disbursement amounts, invoice numbers.
Vendor Amount Date Invoice
TAILOR MADE SOLUTIONS $83,298.23 10/02/09 CO9291
TAILOR MAIDE SOLUTIONS $85,001.22 11/02/09 C09293
TAILOR MADE SOLUTIONS $85,001.22 11/02/09 CO9293
TAILOR MADE SOLUTIONS $83,442.35 12/02/09 CO9360
© 2011 Crowe Horwath LLP 23Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
A Series of Examples – Invoices
Ck. Date Payee Invoice # Ck # Ck Amount
03/12/09 Fabrics Ltd. 203920 2044 $112,400
03/20/09 Fabrics Ltd. 203921 2053 $112,400
03/31/09 Fabrics Ltd. 203922 2072 $112,500
04/05/09 Fabrics Ltd. 203023 2187 $152,839
04/05/09 Fabrics Ltd. 203025 2187 $153,839
Test for shell companies based on invoice numbers issued.
© 2011 Crowe Horwath LLP 24Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Searching For Addresses
Must be consistent in entering data for both the Employee Master and the Vendor Master
St. vs. Street NE vs. North East 123 Main Street, Apartment B vs. 123 Main Street B 123 Main Street
Apartment B
© 2011 Crowe Horwath LLP 25Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Geo-Coding You entered: 1089 East Harrison Street, Martinsville, IN 46151
The Google geocoder found:
1089 E Harrison St, Martinsville, IN 46151, USA
street address: 1089 E Harrison St ZIP/postal code: 46151 city: Martinsville county/district: Morgan state/province: IN country: USA latitude, longitude: 39.429443, -86.415746
39.429443 -86.415746 N39° 25.7666', W086° 24.9448' (precision: address)
Source: http://www.gpsvisualizer.com/geocode
© 2011 Crowe Horwath LLP 26Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
CASE STUDY 1
• Vice President’s use of Credit Card Confidential – do not open Mischaracterized expenses Duplicate receipts
• Discovered – Final Bill after taking employment elsewhere.
© 2011 Crowe Horwath LLP 27Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
CASE STUDY 2
• Accounts Receivable Exception to normal registration Credit Card payments
• Discovered – Bank procedures
© 2011 Crowe Horwath LLP 28Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
CASE STUDY 3
• Department Head Purchases delivered to home Asset hard to value
• Discovered – Asset Audit when DH left employment
© 2011 Crowe Horwath LLP 29Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
THE VISIONAssess where you are today, define where you want to be and begin to close the gap.
ROI RISK
Raw Data – System Reports
Ad Hoc Analysis
Repeatable Analysis
INFORMATION
INTELLIGENCE
DISPARATE DATA
© 2011 Crowe Horwath LLP 30Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
QUESTIONS
© 2011 Crowe Horwath LLP 31Audit | Tax | Advisory | Risk | Performance
The Unique Alternative to the Big Four®
Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction. © 2011 Crowe Horwath LLP
For more information, contact:
Brenda Buetow
Direct 317.269.6697
Mobile 765.318.0919