Detecting Financial Statement Fraud: Three Essays on Fraud ...
Detecting Fraud With Data Mining Slides
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Transcript of Detecting Fraud With Data Mining Slides
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CPAs & ADVISORS
IDEA Webinar Series
Detecting Fraud with Data Mining
Presented by
Jeremy Clopton, CPA, CFE, ACDA
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How Fraud is Detected
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Intriguing Quote on Big Data
As of 2012, about 2.5 exabytes of data are
created each day, and that number is doubling
every 40 months or so.
Harvard Business Review, Big Data: The
Management Revolution
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Growth of Unstructured Data
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Paper-based & limitedelectronic testing
(Sampling)
Reactive ProactiveResponsiveness
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Problems with the old method
Ineffective
Inefficient
Reactive Hindsight
Prevalence of Big Data
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The new method: a wish list
Do more with less
100 percent coverage
Increase effectiveness More insight
Not overly complex
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The New Method: Data Analytics
processes & activities designed to obtain & evaluatedata to extract useful information...
Useful information includesConflicts of interest
Unknown relationships
Abnormal patterns of activity
Errors in key processesControl weaknesses
Hindsight, insight, foresight
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Common Data Mining Areas
Vendors & accounts payable
Employees & payroll
Expense reimbursement
Travel & entertainment
General ledger
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Vendor Attribute Capture
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
TIN
Address
Name
TIN Address Name
Attribute Present 29,276 68,804 69,535
Attribute Missing 40,259 731 -
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Vendor Activity Assessment
FY 2012 FY 2011 FY 2010 FY 2009 pre-FY 2009
10,051 5,765 5,443 4,598 43,678
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5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
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Name Mining
Mick E. Mowse
Princess Ariel
George Ruth
John Dough
1. Acronym / Initials
2. Anagrams
3. Fictitious Names
4. OthersSubstitution
Insertion or Omission
Transposition
Numb3r Subst1tut10n
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Employee/Vendor Relationships
Matching
Attributes
Employee
ID
First
Name
Middle
Initial Last Name Vendor ID Name City State
Total
Payments
Address 123456789 Jeremy R Clopton 987654321 Vendor Name Anytown MO 16,040
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Conflicts of Interest
Matching
Attributes Employee ID
First
Name
Middle
Initial Last Name Vendor ID Name City State
Total
Payments
Address 131313131 Beth E DavisD58468431Davis Designs Anytown MO 5,768
Address, TIN 687431598 George R Davis
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Address Mining Mailbox Services
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Address Mining Proximity
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Address Mining Proximity
Employer
UPS Store
Employee
Home
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Proximity Analysis
Vendor (A)
Jeremys Design Company, 123 5thStreet, Anytown, MO (Total Payments = $84,337)
Employee (B)
Jeremy Clopton, 4300 Oak Street, Anytown, MO
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Proximity Analysis
AP Manager
Vinnys
Salvage
Yard
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Proximity Analysis
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Vendor Trending Analysis
Vendor: JLM Plumbing Authorized: Janice L. McPhearson
Test phase
Acceleration as
confidence builds
Getting
Greedy
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Vendor Trending
Acceleration Patterns:Vendors exhibiting a pattern of
increased activity over multiple
consecutive periods.
Valley Patterns:Vendors exhibiting a pattern of activity
characterized by long periods of
inactivity between periods of activity.
Spike Patterns:Vendors exhibiting a pattern of activity
characterized by unusually high
payments in a single period.
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Payment Trend Analysis
By Day of Week
By Day of Month
By Month
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Benfords Law Analysis Expected
FrequenciesFirst Digit Expected Frequency Second Digit Expected Frequency
1 30.10% 0 11.97%
2 17.61% 1 11.39%
3 12.49% 2 10.88%
4 9.69% 3 10.43%
5 7.92% 4 10.03%
6 6.69% 5 9.67%
7 5.80% 6 9.34%
8 5.12% 7 9.04%
9 4.58% 8 8.76%
9 8.50%
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Benfords Law A/P
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Benfords Law A/P
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Benfords Law Expense Accounts
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Check Sequence analysis
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Purchasing Cards Split Transactions
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Analysis of Overtime Hours (654 hrs)
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20
40
60
80
100
120
140
160
180
Regular Pay Overtime 1.5 Holiday Pay Vacation Pay Sick Leave
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Analysis of Vacation Hours (426 hrs)
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20
40
60
80
100
120
Regular Pay Overtime 1.5 Holiday Pay Vacation Pay Sick Leave Personal Circumstance Leave
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Analysis Of Holiday Hours (182 hrs)
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10
20
30
40
50
60
70
80
90
Regular Pay Overtime 1.5 Holiday Pay Vacation Pay Sick Leave
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Other Areas of Application
Access log controls testing
Maintenance file analysis Vendors
Customers Loans
Credit cards & purchasing cards
Employee expense reimbursements
General ledger
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Whats Next?
Automated testing
Analytics at the speed of business
Foresightin addition to hindsight & insight
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Paper-based & limitedelectronic testing
(Sampling)
Data Analytics
(100% coverage, ad hoc
electronic testing)
Continuous Auditing
(Automated analytics,100% coverage)
Reactive ProactiveResponsiveness
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Example 1 Manufacturing
Company Description
Revenues: $7.9 billion
Internal audit staff: 5
Operating divisions: 20Vendors: 100,000
Employees: 7,000
Payments per year: 250,000
Application of ContinuousAuditing
Risk #1: Conflicts of interest
Solution:Annual employee/vendormatching
Risk #2:Duplicate payments
Solution:Annual analysis of all invoicesfor potential duplicates
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Example 2 Public University
Company Description
Revenues: $1 billion
Internal audit staff: 5
Vendors: 83,000Employees: 3,900
Purchasing card users: 1,100
Application of ContinuousAuditing
Risk #1:Duplicate payments
Solution:Quarterly analysis of allinvoices for potentialduplicates
Risk #2: Split transactionsSolution:
Quarterly analysis ofcardholder transaction details
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Critical Information on Continuous
Auditing
Continuous auditing continuous monitoring
Continuous auditingOwned by internal audit
Risk & control assessmentProcess focused
Continuous monitoring
Owned by managementEffectiveness & adequacy of controls
Control focused
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A PLAN TO GET YOU THERE
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Assess Risk
DefineObjectives
Obtain Data
Develop & ApplyProcedures
Analyze Results
Manage Results
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Progression of Procedure
Development
Single-Purpose(Individual) Tests
Groups of Similar
Tests
Repetitive
Individual Tests
Automation ofGroups of Tests
Groups ofRepetitive Similar
Tests
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Challenge to Consider Data Quality
417-865-8701, (417)865-8701, 8658701, 417-8658701
Missoura, MO, Mis, Miss, MZ, MS, Miz, Mizz
PO Box 34, P.O. Box 34, Box 34, Bx 34, P.O Box 34
Clopton, Clapton, Clompton, Clampton, Cloptin
12345, 12345a, 12345-1, 012345
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Resources
IIA Global Technology Audit Guides Continuous Auditing
Fraud Prevention and Detection in an AutomatedWorld
Data Analysis
ISACA White Paper
Data Analytics A Practical Approach
http://www.audimation.com
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Contact Information
Jeremy Clopton, CPA, CFE, ACDA
Managing Consultant | BKD, LLP Forensics & Valuation Services Group
910 East St. Louis Street, Suite 200
Springfield, Missouri 65806
417.865.8701
Social Media
Blog: bkdforensics.com
Twitter: @j313
LinkedIn: http://www.linkedin.com/in/jeremyclopton/