Best Practices in Detecting Payable Fraud Using Data Analytics

Copyright © 2013 FraudResourceNet™ LLC

Best Practices in Detecting Accounts Payable Fraud Using Data Analysis

August 21, 2013

Special Guest Presenter:Katrina Kiselinchev, CIA, CPA, CFE


About Peter Goldmann, MSc., CFE

President and Founder of White Collar Crime 101

Publisher of White-Collar Crime FighterDeveloper 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

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


About Katrina Kiselinchev, CPA, CIA, CFE, CFF

President of Inclusivitie, We Do “SMART”

Integration Partner with IDEA

Experience across industries, audit, fraud, and value

Achieved Value of $5+ Million & ROI of 2000+%, which

included using IDEA’s SMART Analyzer .

Instructor with AICPA & ACFE

Specific Frauds in Accounts Payable: Duplicates, P‐Card, Travel


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Agenda

Introduction

Standards & Anti‐Fraud Essentials Auditors

Fraud State of the Union

Accounts Payable Background

Accounts Payable Fraud

Overview

Schemes

Red Flags

Aiding Discovery of Fraud: Industry & Risks & Operations

Data Mining for AP Fraud: Analytics & Testing Methods

Case Studies & Practice in Data Analytics

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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


Workplace Fraud



Source: 2012 ACFE Report to the Nations



Source: 2012 ACFE Report to the Nations


Learning Objectives

Uncover Check Fraud in Accounts Payable

Detect Duplicate Billing Schemes

Detect & Prevent Expense Reimbursement Scams

Flag Bogus Invoices

Identify Purchasing Card & Other Expense Scams & Schemes

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Dishonest AP Fraudsters

What They Do:

Create Fake Vendors, Expenses, Receipts, Invoices

Collude and Create Kickback Schemes

Misclassify Expenses

Understate Liabilities

Forge, intercept, alter and counterfeit checks

Take Advantage of Multiple Decentralized Policies

Preferred Vendor / Travel / Card/ P‐Card


Accounts Payable Fraud: Schemes

1) External Accounts Payable Fraud: Sham Vendors Vendor Billing Scams/Double billing Customer/Client Fraud External Hacking of Customer/Vendor Data

2) Internal Accounts Payable Fraud: Shell Company Schemes Internal Billing Schemes Vendor Master File Check Tampering Travel & Entertainment Payroll Fraud Continued…


Accounts Payable Fraud: Schemes

3) Collusion: Bid‐Rigging Invoice Billing Collusion Bribery & Kickbacks Pricing Schemes Payroll Schemes


Polling Question 1

Which One of the Following is a Type of Fraudulent Disbursement Scheme?

A. Asset Req & Transfers

B. Unrecorded Sales

C. Write‐Off Schemes

D. Shell Company


Accounts Payable Fails… Business Fails

How a company manages its Accounts Payable process affects two very important areas of an organization’s business: Cash Flow and Supplier Relationships

Fraud Impacting One or Both of These Areas is Detrimental. Period.

Internal Controls, Fraud Assessments, and Periodic Audits are Very Important to Discover Issues Sooner Rather than

Later.


Prevention of Common Schemes

Prevention: Periodically Review Vendor Listings

Block Fake Receipt Sites

Block Vendors Not on Approved Listings

Block Certain Types of Vendors (P‐Cards)

Disallow Acceptance of Non‐Itemized Receipts

Implement Proper Segregation of Duties

Implement Automated Controls

Implement Budgets


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Payments Name, Address, Phone = Employees Unusual Patterns in Check Amounts Only P.O. Box Addresses Available Improper Locations Over & Under Duplicates, Gaps False

By Vendor Inconsistent Price Fluctuations Excessive Purchases > Budget Unusual Billing Trends

By Accounts & Department Unexpected Trends or Rates Gross Profit Price Adjustments

Accounts PayablesData Analysis Techniques


Detection of Common Schemes

Continuous Monitoring Through Data Analysis

Compare Vendor Invoice Numbers

Compare Vendor Spend v. Budget

Compare Vendor Overall Spend Trends & Approvals

Review Dates on Expenses Submitted for Non‐Working Days

Review for Proper Approver

Review for Expenses in Round Dollars

Review Top 80% Spend by Individual, Vendor, Type

Compare Submission to Prior Two Expense Reports for Fraud

Request Travel Confirmations

Review Monthly & Annual Mileage for Driving Validity & Reasonableness

Periodically Analyze & Review Gaps


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Large Amounts of Data Identify Red Flags Faster Increased Coverage Determine Trends Continuous Analysis Process Improvement

Data Analytics for Fraud:Tools You Can Use

Small Amounts of Data Delay in Identifying Red Flags Decreased Coverage Harder to ID Trends

Data Analytics Traditional Auditing

Show First View of IDEA


Polling Question #2

Which of the following is one of the Collusion Schemes?

A. Vendor Master File Tampering

B. External Hacking of Accounts Payable

C. Check Tampering

D. Invoice Billing

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Case Study: IM A COLLUDING

Initial Contact:

You get an urgent call from someone in AP. They have reviewed accounts payable records, and found some alarming red flags.

“Concerns about Fictitious Vendors”

“Concerns about Vendors with Triple Spend Over Budget”

“We Need a Data Analysis Expert… .. Massive Data”


IM A Colluding

No Master Vendor Review 3+ Years

No Duplicate Spend Review 5+ Years

No Segregation of Duties Between Approving & Paying

No Review of Proper Approver

No Budget v. Actual Review

No Vendor Spend Trend Analysis

.


Software Overview & Introduction

Set Working Folder

Import Data

Check Control Totals


Polling Question 3

Which Preventative Control is IMA Colluding Lacking In?

A. Master Vendor Review

B. Budget v. Actual

C. Vendor Spend Trend Analysis

D. Duplicate Spend Review


Auditee Communication:Planning for Accounts Payable Fraud

Walk‐through of Approvals, Approvers, Policy

Procure‐to‐Pay Cycle

Complete Audit Plan with Data Analysis Incorporated

Include Different Types Alongside Consideration of Fraud


Data Gathering for Data Analysis

Request All Meta Data Fields & FilesEmployee ID, Type of Spend, $ Amount,

Budget


Discovery with DA: Spend

Audits to Perform:

Approver Submissions

Vendor Spend Trends

Duplicates

Budget v Actual

Address v. Employee Address

Approver Submissions

Summarize by Employee

Red Flag #1: Approved Purchase Orders Entered


Polling Question 4

Name a Test That IMA Should Run Initially

to Identify Red Flags?

A. Depreciation Calculation

B. Inventory

C. Expenses Submitted v. Co. Card

D. Vendor Budget v. Actual


Discovery with DA: Duplicates

Red Flag 1 & 2: Numerous Duplicates, Odd Amounts & Quantities


Discovery with DA: Expense v. Card, Expense v. Budget, Type

Red Flag #3:Spend Trends

Red Flag 4:Duplicates

Red Flag 5:Budget v Actual


Polling Question 5

Name the Red Flags Found

A. Spend Trends and Duplicates

B. Inventory Obsolescence

C. Expenses Submitted v. Co. Card

D. Contract Overages


Finding Fraud & Next Steps

1) Complete Summary of Data & Findingsa) Total by Each Type of Discrepancyb) Aggregate Discrepancy

2) Determine Additional Tests to Run & Perform3) Discuss Findings with Owner Initially & Recommendations4) Complete Interviews with Employees 5) Review Gaps & Control Deficiencies & Provide Recommendations 6) Recommend Management Review for Cost v Benefit & Implement ASAP7) Determine if Client has Fraud Insurance Rider. If not, recommend.8) Contact Insurance Carrier (if applicable) & Begin Claim Process.9) Contact Authorities & File Report.10) Determine if Prosecution is Advisable e.g. Dollar Amount, Management, etc.11) Complete Report (See ACFE.com) 12) Complete Supporting Doc for Insurance Co. & Authorities


Formulating Anti-Fraud Policy

Policy Statement: To Prevent & Detect Fraud… and No Tolerance

Definition of Fraud: Intent to Defraud & Personal Gain

Reporting Responsibilities: By Staff Level

Reporting Suspicions: Process & Avenues

Fraud Response Plan: Process Once Potential Investigation is Warranted

Policy Communication: Avenues & Frequency


Proactive Data Analysis

Accounts Payable:

Bulk Fuel & Fuel Cards

Combining Audits & Data Analysis for Fraud

Discovery

Travel & Entertainment

Maintenance

Per Diem & Petty Cash

Supplier Contracts


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Payments Name, Address, Phone = Employees Unusual Patterns in Check Amounts Only P.O. Box Addresses Available Improper Locations Over & Under Duplicates, Gaps False

By Vendor Inconsistent Price Fluctuations Excessive Purchases > Budget Unusual Billing Trends

By Accounts & Department Unexpected Trends or Rates Gross Profit Price Adjustments

Accounts PayablesData Analysis Techniques


Questions?

Questions?


Thank You!

Website: http://www.fraudresourcenet.com

Jim KaplanFraudResourceNet™

800-385-1625 [email protected]

Peter GoldmannFraudResourceNet™

[email protected]

Katrina KiselinchevInclusivitie, LLC832-236-4778

Email: [email protected]://www.inclusivitie.com


Coming Up This Month

“Continuous Controls Monitoring (Putting Controls in Place Is Not Enough)” (Sept. 11)

“Protecting Your Organization from the Growing Threat of Cyber Fraud” (Sept. 18)

“A Primer on Social Networking and Fraud Risk—What you Don’t Know Can Cost You” (Sept 25)

Best Practices in Detecting Payable Fraud Using Data Analytics

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