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Copyright © FraudResourceNet LLC
How to Use Data Analytics to
Expose Fixed Asset and Inventory
Fraudsters
Special Guest Presenter:
Stefan Davis, TopCAATs
March 19, 2014
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

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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 Peter Goldmann, MSc., CFE
About Stefan Davis, MEng, MBA
• Director at Reinvent Data
• Former Big-4 Auditor and Consultant
• Co-developer of TopCAATs, an Excel based CAATs
package
• Writer of numerous eBooks and whitepapers on
CAATs and data analytics for Auditors

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Disclaimers

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 Phantom inventory: How to know what’s really in your
warehouses and what’s not
 How managers conceal inventory and capital asset theft
by reporting fraudulently inflated values
 Case studies of inventory / fixed asset theft and
concealment
 Effective data analytics tests revealing red flags of
inventory theft and asset value misstatement
 What to do after data analytics has uncovered signs of
asset fraud / misstatement
Learning Objectives
 Introduction
 In the news: Costliest forms of fixed asset and inventory
fraud
 Fixed asset and inventory fraudsters
 AssetCo case
 Planning for fixed asset and/or inventory fraud
engagements
 Data gathering and software introduction
 Discovery with data analysis: Is there fraud at AssetCo
 Red flag detection and collusion
 Finding fixed asset and inventory fraud and next steps
Agenda

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According to ACFE's "Report to the
Nations on Occupational Fraud and
Abuse”:
 > 7% of Fraud Cases in Financial
Statement Fraud with < 99
Employees
 > 15% of Fraud Cases in Non-Cash
Schemes (i.e. financial statement
manipulation)
 Private Companies at 39%+ of 2012
Fraud, $200k+ per Incident
 Banking & Financial Services,
Government, and Manufacturing—
Highest Fraud %
Costliest forms of fixed asset
and inventory fraud
Example fixed asset cycle
Source: rksolution.co.in
Fixed Assets
 Booking fictitious assets
 Misrepresenting asset valuation
 Improper capitalization
 Asset theft
Inventory
 Stealing inventory
 Diverting inventory in transit
 Manipulating inventory quantities on hand / creating phantom
inventory
 Inflating inventory costs
 Misrepresenting inventory valuation
 Reversing inventory adjustments at period-end
Fraud schemes

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What percentage of all frauds are non-cash schemes
(e.g. financial statement frauds)?
A 5%
B 10%
C 15%
D 25%
Polling Question 1
Description: The perpetrator and his companies were the guarantors of several
large loans related to entertainment contracts. The loans were participation loans
with several foreign banks. Fraud began with failure to record or disclose a liability
caused by a failed loan.
Perpetrator’s internal accountants relayed that the bankers had requested that the
loss be kept off financial statements and that the external CPAs did not know about
it. The fraud grew to include overstatement of assets and understatement of
liabilities to keep the businesses functioning.
Dollar loss: $236 million.
What was done to conceal the fraud: Extensive internal collusion helped to hide
the fraud.
“Audit evidence” provided to external CPAs included
falsified contracts and invoices that presented certain
assets as company- owned.
Assets that were sold were not removed from the books,
assets that were borrowed were presented as owned, and
certain guarantees of loans were not disclosed.
How the scheme was detected: A whistleblower tipped off
authorities to the fraud.
AICPA Fraud Task Force &
Six Men & $4bn in Fraud
It all started with a loan failure…

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Perpetrators of fraud
Data analytics software
Couple of TOPCAATS selling points
Benefits Data analytics Traditional audit techniques
Save time • Identify red flags quickly
• Computerised procedures
• Delays in identifying red flags
• Manual procedures
Reduce risk • Test entire populations
• Perform continuous analysis
• Test a sample from the population
• Not feasible to perform continuous
analysis
Add value • Identify every individual anomaly
• Determine trends
• Identify large or ongoing anomalies
• Difficult to determine trends
Create
opportunities
• Handle huge amounts of data • Handle limited amounts of data

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 Using set rules to identify transactions
of higher risk
 Every company is different, has a
different environment, different systems,
different risks, etc.
 Need to use judgment to select testing
 Need to use judgment to evaluate
results
 Just because a transaction matches a
red flag doesn’t mean fraud is present
 Using data analytics does not guarantee
finding fraud or finding all fraud!
Principles of Using Data Analytics
to Detect Fraud
The Data Analysis Cycle
Plan your
testing
Request
Data
Obtain and
Clean Data
Carry out
testing
Evaluate and
Follow up
Review
Continuous
Learning

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1. Open / import data file
2. Cleanse data (if necessary)
3. Check column statistics (check-totals)
TopCAATs - Getting Started
Ima Tipster calls AssetCo’s
whistleblowers hotline with
anonymous tip that:
 There is massive theft going on in
the warehouse
 They think assets are being
overstated to meet loan covenants
 They have general concerns about
fixed asset and inventory fraud
 They’re scared to come forward or
raise anything with management
AssetCo Case Study: First Contact

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 1000+ assets with no physical review (maybe
this wasn’t a material site?)
 Profits are increasing but cash flow is negative
 Haven’t performed a comparison of sales price
vs. book value for inventory
 Caught Operations Manager stealing stock via
CCTV
 Tight loan covenants, EBITDA close to
breaching covenants every quarter
 Two people are responsible for fixed assets and
inventory but they are centralized (Corporate)
 All inventory-holding locations are decentralized
AssetCo: Interview Findings
Choose all of the following that are components of the
data analytics cycle:
A Request data
B Clean data
C Conduct testing
D Review
E All of the above
Polling Question 2

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Operations Manager
 Assumed CCTV cameras were not working
 Thought he would never get caught
 Hadn’t had a raise in over 3 years
 Worked at AssetCo for 10 years
 Claims he had not stolen anything before
 Needed the extra money to pay the rent
Fixed Asset Clerk
 Reviewed CCTV tapes and notified management
 Told by manager that it’s okay not to do physical counts
AssetCo: Interview Findings
• Walk through processes
 Asset additions, disposal and transfer
 Inventory booking in and out
 Purchase to Pay (P2P) cycle and CoGS transfer
• Understand key controls in place and gaps
 e.g. Inventory counts, fixed asset verification
 Ensure you include those operated both locally and centrally
• Understand relevant and notable history
 Process changes, significant acquisitions, inventory transfers, etc.
• Develop hypotheses
• Develop plan to test hypotheses incorporating data
analysis
Planning

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When considering financial statement fraud…
 Completeness – are there any assets off-balance sheet?
 Existence – are these assets actually there?
 Accuracy – are the costs of these assets correct?
 Valuation – are the values of these assets appropriate?
 Ownership – does the company have rights to the assets?
 Presentation – are the assets correctly classified?
Assertion Risks
Which three of these would normally be the primary
focus when looking for inventory asset fraud using
data analysis?
A Completeness
B Existence
C Accuracy
D Valuation
E Ownership
F Presentation
Polling Question 3

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 No asset revaluation other than write-up with
acquisitions
 No policy in relation to capital vs expense items and no
review
 No recalculation of depreciation (should have a system
control but someone could get around it).
 No capital or inventory budgetary review
 No oversight of transfer of inventory to CoGS
 Monthly inventory values are submitted by each site (no
corporate-wide inventory system)
 Inventory transfer in from another site before year-end
 Recurring negative cash flows
AssetCo: Planning observations
Fixed Assets
 Compare asset register totals to ledgers
 Recalculate depreciation
 Review asset lives for each category
 Identify duplicate assets
 Review for incorrectly capitalized assets
 Review significant additions
Initial Test Plan

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Inventory
 Check totals to corporate submissions
 Join for Stock, Sales and Purchase data sources
 Test stock against Benford’s Law
 Compare stock value to purchase prices
 Review for aged / obsolete inventory
 Compare stock value to sales prices
 Review for purchase of obsolete inventory
 Check CoGS transfer dates
 Compare dispatched vs received for inter-site transfer
Also consider tests with sales, accounts payable, closing
entries
Initial Test Plan
Request all data fields and files in line with desired tests
Data gathering
Inventory
 Part number
 Part description
 Unit cost
 Quantity
 Total value
 Part status (e.g. current, obsolete)
Inventory purchases
 GRN date
 GRN quantity
 Unit cost
 Vendor ID, name, address
 Purchase order number
 Posted by and approved by ID
 Budgets by vendor or product
 Comments
Sales
 Sold quantity
 Sales price
 Transfer to COGS
 Customer ID, name, address
 Date of sale
 Date of transfer to CoGS

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Request all data fields and files in line with desired tests
Data gathering (cont’d)
Fixed assets
 Asset ID
 Depreciation for period
 Accumulated depreciation
 Net book value
 Asset description
 Date of purchase
 Date of sale
 Date of disposal
 Loss / Gain on Sale
 Acquisition revaluations and dates
Which of the following are useful tests for inventory
manipulation?
A. Test stock against Benford’s Law
B. Compare stock value to purchase prices
C. Review for aged / obsolete inventory
D. None of the above
E. All of the above
Polling Question 4

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 Speak to IT departments not just process owners
 Flat files (e.g. “.csv”) are best
 Be specific– the more information you can provide the
better
 Use a data request template
Getting the data
You can find an example data request template at
www.topcaats.com/datarequestform
1. Assets under-depreciated
2. Various lives within an asset category
Assets - Red flags

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3. Duplicated assets
4. Repairs and maintenance capitalized
Assets - Red flags
5. Low value items capitalized
6. Significant additions
Assets - Red flags

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1. Stock listing totals not agreeing to ledger (E)
2. Receipt of obsolete inventory (E/V)
Inventory - Red flags
3. Inventory site transfer received ≠ despatched (E)
Add screenshot

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4. CoGS transfer in period after sale made (E)
5. Stock value much greater than last purchase prices
6. Stock value not between max/min purchase prices
7. Values not conforming to Benford’s law

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8. Sales prices lower than cost held in stock
9. Aged inventory
Sales prices that are lower than cost held in stock is a
red flag of inventory fraud
A True
B. False
Polling Question 5

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1. Compile a summary of data used and findings in each area
2. Determine any additional tests required and perform
3. Discuss initial findings with CEO and recommend follow-up steps
4. Conduct follow-up interviews with employees
5. Review control gaps and deficiencies and make recommendations
6. Recommend management develop a business case and implement
ASAP
7. Determine if client has fraud insurance rider, recommend consideration
8. Contact insurer (if applicable) and begin claim process
9. Contact the authorities and file a report
10. Determine if prosecution is viable
11. Complete report (see ACFE.com)
12. Compile required supporting documentation for insurer and authorities
Next steps
Fixed Assets
 Implement capital vs expense items policy
 Add review controls for capitalization of assets over $X
 Add system controls to prevent capitalization of assets under $X
 Default depreciation calculation based on asset category
 Add test of comparison of anticipated value to book value
 Implement capital and inventory budgetary review
 Add surprise physical verification of assets
 Obtain expected industry valuation and decline by year for significant assets
Inventory
 Add control at month-end over CoGS transfer period
 Add system controls over price and quantity adjustments
 Implement provisioning policy for aged / obsolete stock
 Perform audited counts of all inventory of high volume sites (PI or annual)
 Corporate oversight of significant transfers between sites
 Implement inventory budgetary review
Fraud prevention

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Continuous Monitoring
 Complete risk assessment and develop annual audit plan
 Determine monthly and quarterly testing by priority
 Implement data analysis testing and incorporate into annual audit
plan
 Perform and complete ongoing control assessments
Fraud prevention
Questions?

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Peter Goldmann
FraudResourceNet LLC
800-440-2261
www.fraudresourcenet.com
pgoldmann@fraudresourcenet.com
Jim Kaplan
FraudResourceNet LLC
800-385-1625
www.fraudresourcenet.com
jkaplan@fraudresourcenet.com
Stefan Davis
Reinvent Data Ltd
www.topcaats.com
stefan.davis@reinventdata.com
Thank You!
Coming Up
Upcoming March Anti-Fraud
Webinar…
 "Background Checks: Best
Practices for Reducing Employee
Fraud”, April 17, 2014
 "Effective General Ledger and
Journal Entry Fraud Testing Using
Data Analytics”, April 23, 2014
 Sign up at:
http://www.fraudresourcenet.com

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