Best Practices in Detecting Payable Fraud Using Data Analytics

Best Practices in Detecting
Accounts Payable Fraud
Using Data Analysis
August 21, 2013
Special Guest Presenter:
Katrina Kiselinchev, CIA, CPA, CFE

Copyright © 2013 FraudResourceNet™ LLC

About Peter Goldmann, MSc., CFE



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 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
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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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CS

Disclaimers


The views expressed by the presenters do not necessarily represent the
views, positions, or opinions of FraudResourceNet LLC (FRN) or the
presenters’ respective organizations. These materials, and the oral
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5

Agenda
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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

6

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
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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


13

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.
B.
C.
D.

Asset Req & Transfers
Unrecorded Sales
Write‐Off Schemes
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:
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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


Accounts Payables
Data Analysis Techniques
 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


20

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


Data Analytics for Fraud:
Tools You Can Use
Data Analytics
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Traditional Auditing

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

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

Show First View of IDEA


22

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


23

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
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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.
B.
C.
D.

Master Vendor Review
Budget v. Actual
Vendor Spend Trend Analysis
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 & Files
Employee 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.
B.
C.
D.

Depreciation Calculation
Inventory
Expenses Submitted v. Co. Card
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.
B.
C.
D.

Spend Trends and Duplicates
Inventory Obsolescence
Expenses Submitted v. Co. Card
Contract Overages


Finding Fraud & Next Steps
1)  Complete Summary of Data & Findings
a) Total by Each Type of Discrepancy
b) Aggregate Discrepancy
2)    Determine Additional Tests to Run & Perform
3) Discuss Findings with Owner Initially & Recommendations
4) Complete Interviews with Employees
5) Review Gaps & Control Deficiencies & Provide Recommendations
6) Recommend Management Review for Cost v Benefit & Implement ASAP
7) 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
Combining Audits &
Data Analysis for Fraud
Discovery

Accounts Payable:

Maintenance

Per Diem & Petty Cash
Bulk Fuel & Fuel Cards

Supplier Contracts
Travel & Entertainment


Accounts Payables
Data Analysis Techniques
 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


38

Questions?
 Questions?


Thank You!
Website: http://www.fraudresourcenet.com
Jim Kaplan
FraudResourceNet™
800-385-1625
jkaplan@fraudresourcenet.com
Peter Goldmann
FraudResourceNet™
800-440-2261
pgoldmann@fraudresourcenet.com
Katrina Kiselinchev
Inclusivitie, LLC
832-236-4778
Email: katrina@inclusivitie.com
http://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)

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