AuditNet®
CAATT Tales
Applying Data Analysis to Uncover an Ongoing Fraud Scheme
By Don Sparks, CIA, CISA, ARM
Audimation Services, Inc.
Experts in Data Analysis
Volume 1 Issue 2
Truth can often be found in simplicity. Such was the case with an east-coast company that discovered a six-year fraud scam, totaling $860,000 in losses.
Just as the ACFE report indicates, the $750 million company had its share of office rumors and tips provided during employee exit interviews. Since the company did not have an internal audit function, the CEO and CFO were notified and instructed accounts payable to investigate. Each time, the designated accounts payable “investigator” would report back to the c-suite that all was well and the rumors were simply spread by disgruntled employees. After six years of rumors and yet another exit interview tip pointed towards fraud in the accounts payable department, company executives turned to a Certified Fraud Examiner (CFE) to investigate the issue.
The
fraud investigator applied an Occam’s Razor principle of simplicity and
data analysis technology to his work by asking three simple questions:
1.) How many employees are in accounts payable?
2.) How long has each employee been in accounts payable?
3.) Can you provide 100 percent of accounts payable data for the years
the longest-term employee has worked in accounts payable?
Armed
with information that there were five accounts payable employees, and
the longest-term employee had worked for the company six years, the
company provided six years of accounts payable data. The fraud
investigator imported the data into IDEA – Data Analysis Software using
a simple 10-step process, designed for importing PDFs:
1.) Highlight detail line
2.) Define trap statements
3.) Define fields
4.) Green check to apply layer
5.) Create second layer if necessary
6.) Scan for errors
7.) Preview database
8.) File – Save As – Template (allows you to automate the import process
for additional documents)
9.) Import into IDEA
10.) Check control totals
Note: When you install IDEA on your PC, there are three comprehensive tutorials loaded onto your hard drive. Choose Start button ► All programs ► IDEA ► Documentation
Once the accounts payable data was imported into IDEA, the fraud investigator summarized the data using the Amount field, showing the number of occurrences of each check amount in the six-year data file. The fraud investigator, together with the c-level executives, reviewed the results that very same afternoon and decided the best approach was to ask the company’s bank to re-image the checks appearing in the highest repeating check dollar amounts. Had they merely checked the accounts payable file, which of course contained the same data as the extract provided to the fraud investigation, everything would have appeared to be in order. The bank was instructed to look for patterns, and if found, stop the re-image process and report their findings.
The bank easily detected a pattern where many checks were made payable
to, and were endorsed by, the accounts payable employee who had worked
for the company six years. In that time, she had swindled an astonishing
$860,000 from her employer. You guessed it – it was the same accounts
payable employee the c-suite had tapped to investigate when rumors or
tips of fraud occurred. The case clearly involved a separation of duties
issue in addition to a deep fraud scheme. The employee was arrested and
convicted for her fraud crimes. At that moment, the fraud investigator
knew he had secured a “client for life,” and worked collectively
together to put internal controls in place to help prevent future
infractions. Since then, the fraud investigator has been called upon the
client and associates of the client company to provide data analysis on
other problems, beyond fraud-related issues.
Data analysis tools can simplify the process of sharing audit findings with management or clients. IDEA Version Eight includes a Project Overview feature that presents a graphical representation of the entire audit or investigation process. The graphical overview includes all the actions performed within a Working Folder, including the creation, deletion, and modification of databases as well as recording all actions performed. It provides the ability to independently review the workflows including drill-down capabilities for additional history.
Simple approach. Big impact. Don Sparks (CIA, CISA, ARM), an experienced internal auditor and fraud detection expert concludes, “The take away from this real-world case study is that fraud investigators and auditors add value when they find anomalies not previously detected,” said Sparks, vice president with Audimation Services, Inc. “Consultants of any specialty have learned that nothing earns respect faster in the c-suite than the ability to inform management of facts they did not already know, but need to know.”
The fastest and most effective way to perform analytical procedures, such as summarization, which was used in this particular instance, is to harness the power of data analysis technology. Data mining and analysis tools like IDEA have been used by accountants, auditors and financial professionals for more than 20 years. They are designed to improve risk assessment, uncover fraud and identify control issues. Even if you pursue rumors or tips, and scan data for instances of fraud, imagine how much more you could find by using data analysis tools and techniques – simply by adding available technology to your knowledge of audit or fraud investigation work.
IDEA is a registered trademark of CaseWare International Inc.
Take IDEA for a test drive:
If you would like to try this feature out for yourself, request a demo copy of the IDEA data analysis software [CLICK HERE].
To
respond to this solution or provide data analysis questions you would
like answered in future newsletter articles, please send an email to
dons@audimation.com
The opinions, beliefs and viewpoints expressed by the various authors and forum participants on this web site do not necessarily reflect the opinions, beliefs and viewpoints of AuditNet®