Using Data Analytics to Detect Fraud · the financial statements. Types of financial statement...
Transcript of Using Data Analytics to Detect Fraud · the financial statements. Types of financial statement...
© 2018 Association of Certified Fraud Examiners, Inc.
Using Data Analytics to
Detect Fraud
Data Analysis Tests for Detecting
Financial Statement Fraud
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Financial Statement Fraud Schemes
▪ The fraudster
intentionally
misstates or omits
financial statement
amounts or
disclosures to
deceive users of the
financial statements.
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Financial Statement Fraud Schemes
▪ Typically involve:
• Falsifying, altering, or manipulating financial
records, supporting documents, or business
transactions
• Recording fictitious transactions or transactions
that lack economic substance
• Intentionally omitting or misrepresenting
information about transactions or events
• Intentionally misapplying generally accepted
accounting principles (GAAP)
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Financial Statement Fraud Schemes
▪ Overstatement of revenue
▪ Overstatement of assets
▪ Understatement of expenses
▪ Understatement of liabilities
▪ Improper disclosures
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Red Flags of Financial
Statement Fraud Schemes
▪ Anomalies in profitability
▪ Anomalies in cash flows
▪ Anomalies in assets
▪ Anomalies in liabilities
▪ Anomalies in equity accounts
▪ Anomalies in relationships between financial
statement items
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Red Flags of Financial
Statement Fraud Schemes
▪ Anomalies in significant transactions
▪ Anomalies in journal entries
▪ Anomalies in account balances
▪ Anomalies in business structure or operations
▪ Changes in industry, regulatory environment, or
other external risk factors
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Tests for Financial Statement
Fraud Schemes
▪ Financial statement analyses identify
changes, trends, and significant accounts on
the financial statements.
▪ Types of financial statement analysis:
• Horizontal analysis
• Vertical analysis
• Ratio analysis
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Horizontal Analysis
▪ Analyzes percentage change in individual
financial statement items from one period to
the next
▪ Can be performed on companywide data or
on segregated data (e.g., by department or
location)
▪ Watch items that should move in tandem:
• Sales and warranty liability
• Sales and cost of goods sold
• Purchases and payables to cash paid to vendors
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Horizontal Analysis—Balance Sheet
20X3 20X2 Change 20X1 Change
Assets
Current assets
Cash and cash equivalents $27,491 $3,506 684.10% $1,686 107.95%
Accounts receivables, net $33,054 $16,085 105.50% $8,475 89.79%
Prepaid expenses and other current
assets$2,198 $1,435 53.20% $395 263.29%
Deferred tax assets, net $716 — —
Total current assets $63,459 $21,026 201.80% $10,556 99.19%
Property and equipment, net $13,773 $6,891 99.90% $2,197 213.65%
Long-term accounts receivables $2,700 — —
Deposits and other assets $2,757 $2,148 28.40% $251 755.78%
Total assets $82,689 $30,065 175.00% $13,004 131.20%
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Horizontal Analysis—Balance Sheet20X3 20X2 Change 20X1 Change
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued
expenses$11,904 $9,636 23.50% $2,811 242.80%
Accrued compensations and employee
benefits$7,356 $3,633 102.50% $1,748 107.84%
Deferred revenue $10,732 $8,340 28.70% $5,120 62.89%
Line-of-credit — $4,508 -100.00% $2,758 63.45%
Notes payable, current portion — $900 -100.00% $356 152.81%
Dividend notes payable $5,000
Total current liabilities $34,992 $27,017 29.50% $12,793 111.19%
Notes payable, long-term portion — $2,428 $460 427.83%
Deferred revenue $746 $1,047 -28.70% $544 92.46%
Deferred tax liabilities, net $671 — —
Total liabilities $36,409 $30,492 19.40% $13,797 121.00%
Total shareholders’ equity (deficit) $46,280 ($427) -10938.40% ($793) -46.15%
Total liabilities and shareholders’ equity $82,689 $30,065 175.00% $13,004 131.20%
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Horizontal Analysis—Income Statement
20X3 20X2 Change 20X1 Change
Total revenues $106,430 $53,557 98.7% $22,603 136.9%
Total cost of goods sold $19,781 $11,116 78.0% $5,257 111.5%
Gross margin $86,649 $42,441 104.2% $17,346 144.7%
Operating expenses
Sales and marketing $53,408 $30,468 75.3% $13,054 133.4%
Research and development $12,106 $5,049 139.8% $2,840 77.8%
General and administrative $11,809 $6,552 80.2% $3,742 75.1%
Total operating expenses $77,323 $42,069 83.8% $19,636 114.2%
Income (loss) from operations $9,326 $372 2407.0% ($2,290) (116.2)%
Provision for income taxes ($3,442) — —
Net income (loss) $6,178 $121 5005.8% ($2,375) (105.1)%
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Vertical Analysis
▪ Analyzes the relationships among the items
on an income statement, balance sheet, or
statement of cash flows by expressing
components as percentages
▪ Highlights which accounts are the biggest
drivers of company performance
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Vertical Analysis—Balance Sheet
20X3 20X2 20X1
Assets
Current assets
Cash and cash equivalents 33.25% 11.66% 12.97%
Accounts receivables, net 39.97% 53.50% 65.17%
Prepaid expenses and other current
assets2.66% 4.77% 3.04%
Deferred tax assets, net 0.87% — —
Total current assets 76.74% 69.94% 81.18%
Property and equipment, net 16.66% 22.92% 16.89%
Long-term accounts receivables 3.27% — —
Deposits and other assets 3.33% 7.14% 1.93%
Total assets 100.00% 100.00% 100.00%
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Vertical Analysis—Balance Sheet20X3 20X2 20X1
Liabilities and shareholders’ equity
Current liabilities
Accounts payable and accrued expenses 14.40% 32.05% 21.62%
Accrued compensations and employee benefits 8.9% 12.08% 13.44%
Deferred revenue 12.98% 27.74% 39.37%
Line-of-credit — 14.99% 21.21%
Notes payable, current portion — 2.99% 2.74%
Dividend notes payable 6.05% — —
Total current liabilities 42.32% 89.86% 98.38%
Notes payable, long-term portion 8.08% 3.54%
Deferred revenue 0.90% 3.48% 4.18%
Deferred tax liabilities, net 0.81% — —
Total liabilities 44.03% 101.42% 106.10%
Total shareholders’ equity (deficit) 55.97% (1.42)% (6.10)%
Total liabilities and shareholders’ equity 100.00% 100.00% 100.00%
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Vertical Analysis—Income Statement
20X3 20X2 20X1
Revenues 100.00% 100.00% 100.00%
Total cost of goods sold 18.59% 20.76% 23.26%
Gross margin 81.41% 79.24% 76.74%
Operating expenses
Sales and marketing 50.18% 56.89% 57.75%
Research and development 11.37% 9.43% 12.56%
General and administrative 11.10% 12.23% 16.56%
Total operating expenses 72.65% 78.55% 86.87%
Income (loss) from operations 8.76% 0.69% (10.13)%
Provision for income taxes (3.23)% — —
Net income (loss) 5.80% 0.23% (10.51)%
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Ratio Analysis
▪ Means of measuring the relationship
between two different financial statement
amounts:
• Accounts receivable turnover
• Sales to total assets
• Related-party sales to total assets
• Working capital to total assets
• Leverage ratios
• Ratios involving nonfinancial data
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Other Tests for Financial
Statement Fraud Schemes
▪ Tests to identify
anomalies in:
• Journal entries
• Account balances
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Robert Gunning’s Fog Index
▪ Analyzes notes to financial statements
▪ Measures readability of a sample of writing
▪ Uses index comparisons to identify
significant changes in readability
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Gunning’s Fog Index
▪ Compare the Fog Index score of a particular
note in a particular period to that of a similar
note:
• In a different period
• Of a similar company
▪ Compare the Fog Index score of all the notes
combined in a particular period to that of all
of the notes combined:
• In a different period
• Of a similar company