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Managing the business risk of fraud using sampling and data mining EZ-R Stats, LLC
Managing the Business Risk of Fraud using Sampling and
Data Mining
Fall 2009
Mike BlakleyMike Blakley
Presented to:
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Managing the business risk of fraud EZ-R Stats, LLC
PWC Global Survey – Nov, 2009“Economic crime in a downturn”
Sharp rise in accounting fraud over the past 12 months
Accounting fraud had grown to 38 percent of the economic crimes in 2009
Employees face increased pressures to :
– meet performance targets– keep their jobs – keep access to funding
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Managing the business risk of fraud EZ-R Stats, LLC
Survey findings
Greater risk of fraud due to increased incentives or pressures
More opportunities to commit fraud, partially due to reductions in internal finance staff
While companies are expecting more fraud, they have not done much
People who look for fraud are more likely to find it
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Managing the business risk of fraud EZ-R Stats, LLC
Session objectives
Understand the framework for managing the business risk of fraud
Plan, perform and explain statistical sampling in audits Reduce audit costs using data mining, sequential
sampling and other sampling techniques Apply SAS 56, the new SAS suite and the revised
(2007) Yellow Book. Run, hands-on, the most productive analytic technique
(regression analysis). Use data mining to introduce greater efficiency into the
audit process, without losing effectiveness.
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Managing the business risk of fraud EZ-R Stats, LLC
Session agenda - 1
Introduction and the Process for Managing the Business Risk of Fraud
Introductions All Around Course Objectives Framework of risk management for fraud Fundamentals of data mining Data mining: The Engine That Drives analysis
– Analytics and Regression Sources of Analytics Data Basic and Intermediate ARTs
SAS 56 IIA Practice Advisory 2320 The Yellow Book (2007 revision) The Guide – “Managing the Business Risk of Fraud”
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Managing the business risk of fraud EZ-R Stats, LLC
Session Agenda (cont’d) – Sampling refresher
Sampling The sampling process Sampling methods RAT-STATS
– Random Numbers– Determining Sample Size– Case Study– Attribute sampling– Variable Sampling– Case study– Stratified Sampling– Obtaining and Interpreting the results
Other Sampling Approaches DCAA Audit Package Sequential Sampling Overview of the process Attribute Sampling Variable Sampling
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Managing the business risk of fraud EZ-R Stats, LLC
Session Agenda (cont’d) – Linear regression as an
audit tool
Regression Analysis Overview Terms Statistical basis Charting Regression … Seeing Is Believing Plotting Data
– Inserting a “Trend line” Statistical Intervals
– Confidence Intervals– Prediction Intervals– Calculation of Statistical “Confidence Bounds”
Case Study - Wake County Schools Bus Maintenance
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Managing the business risk of fraud EZ-R Stats, LLC
Session Agenda (cont’d) – Data mining, or
How to test 100%
Overview Statistical Basis Data Conversion and Extraction Data mining objectives
– Classification– Trends– Identification of extremes– Major types of data analysis
Numeric Date Text
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Managing the business risk of fraud EZ-R Stats, LLC
Session Agenda (cont’d) – Excel as an Analytics tool
Macros Tools – Data Analysis The Macro facility
– Adding a little “class” to your audit– VBA – “friend” or “foe”
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Managing the business risk of fraud EZ-R Stats, LLC
Handout (CD)
CD with articles and software PowerPoint presentation More info at www.ezrstats.com
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Managing the business risk of fraud EZ-R Stats, LLC
“Cockroach” theory of auditing
If you spot one roach….
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Managing the business risk of fraud EZ-R Stats, LLC
“Cockroach” theory of auditing
There are probably 30 more that you don’t see…
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Managing the business risk of fraud EZ-R Stats, LLC
Statistics based “roach” hunting
Many frauds coulda/woulda/shoulda been detected with analytics
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Managing the business risk of fraud EZ-R Stats, LLC
Overview
Fraud patterns detectable with digital analysis
Basis for digital analysis approach
Usage examplesContinuous monitoringBusiness analytics
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Managing the business risk of fraud EZ-R Stats, LLC
The Why and How
Three brief examples ACFE/IIA/AICPA Guidance Paper Practice Advisory 2320-1 Auditors “Top 10” Process Overview Who, What, Why, When & Where
Objective 1
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Managing the business risk of fraud EZ-R Stats, LLC
Example 1Wake County Transportation Fraud
Supplier Kickback – School Bus parts
$5 million Jail sentences Period of years
Objective 1a
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Managing the business risk of fraud EZ-R Stats, LLC
Too little too late
Understaffed internal audit Software not used Data on multiple platforms Transaction volumes large
Objective 1a
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Managing the business risk of fraud EZ-R Stats, LLC
Preventable
Need structured, objective approach
Let the data “talk to you” Need efficient and effective
approach
Objective 1a
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Managing the business risk of fraud EZ-R Stats, LLC
Regression Analysis
Stepwise to find relationships
– Forwards– Backwards
Intervals– Confidence– Prediction
Objective 1
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Managing the business risk of fraud EZ-R Stats, LLC
Data outliers
Objective 1
Sometimes an “out and out Liar”
But how do you detect it?
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Managing the business risk of fraud EZ-R Stats, LLC
Data Outliers
Plot transportation costs vs. number of buses
“Drill down” on costs– Preventive maintenance– Fuel– Inspection
Objective 1
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Managing the business risk of fraud EZ-R Stats, LLC
Scatter plot with prediction and confidence intervals
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Managing the business risk of fraud EZ-R Stats, LLC
Cost of six types of AIDS drugs
Total Cost of AIDS Drugs
0
50
100
150
200
NDC1 NDC2 NDC3 NDC4 NDC5 NDC6
Drug Type
Dol
lar
Am
ount NDC1
NDC2
NDC3
NDC4
NDC5
NDC6
Example 2 Objective 1a
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Managing the business risk of fraud EZ-R Stats, LLC
Medicare HIV Infusion Costs
Objective 1
CMS Report for 2005 South Florida - $2.2 Billion Rest of the country combined -
$.1 Billion
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Managing the business risk of fraud EZ-R Stats, LLC
Pareto ChartObjective 1
Medicare HIV Infusion Costs - 2005 ($Billions)data source: HHS CMS
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
County
Ann
ual M
edic
are
Cos
ts
Pct
Cum Pct
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Managing the business risk of fraud EZ-R Stats, LLC
Typical Prescription Patterns
AIDS Drugs Prescription Patterns
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Prov 1 Prov 2 Prov 3 Prov 4 Prov 5 Prov 6
Prescriber
Dol
lar
Val
ue
NDC1
NDC2
NDC3
NDC4
NDC5
NDC6
Example 2 Objective 1a
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Managing the business risk of fraud EZ-R Stats, LLC
Prescriptions by Dr. X
Dr. X compared with Total Population
050
100150200250
300350
NDC1 NDC2 NDC3 NDC4 NDC5 NDC6
Drug Type
Dol
lar
Am
ount
Population
Dr. X
Example 2 Objective 1a
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Managing the business risk of fraud EZ-R Stats, LLC
Off-label use
Serostim– Treat wasting syndrome, side effect of
AIDS, OR– Used by body builders for recreational
purposes– One physician prescribed $11.5 million
worth (12% of the entire state)
Example 2 Objective 1a
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Managing the business risk of fraud EZ-R Stats, LLC
Revenue trends
Overall Revenue Trend
0.9
0.95
1
1.05
1.1
1.15
1.2
2001 2002 2003
Calendar Year
Ann
ual B
illin
gs
Overall
Linear (Overall)
Example 3 Objective 1a
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Managing the business risk of fraud EZ-R Stats, LLC
Dental Billings
Rapid Increase in Revenues
0
1
2
3
4
5
2001 2002 2003
Calendar Year
Ann
ual B
illin
gs
($m
illio
ns) Billings A
Billings B
Linear (Billings A)
Example 3 Objective 1a
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Managing the business risk of fraud EZ-R Stats, LLC
Guidance Paper
A proposed implementation approach “Managing the Business Risk of Fraud: A
Practical Guide” http://tinyurl.com/3ldfza Five Principles Fraud Detection Coordinated Investigation Approach
Objective 1b
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Managing the business risk of fraud EZ-R Stats, LLC
Managing the Business Risk of Fraud: A Practical Guide
ACFE, IIA and AICPA Exposure draft issued 11/2007, final 5/2008
Section 4 – Fraud Detection
Objective 1b
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Managing the business risk of fraud EZ-R Stats, LLC
Guidance Paper
Five Sections– Fraud Risk Governance– Fraud Risk Assessment– Fraud Prevention– Fraud Detection– Fraud Investigation and
corrective action
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Managing the business risk of fraud EZ-R Stats, LLC
Risk Governance
Fraud risk management program Written policy – management’s expectations
regarding managing fraud risk
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Managing the business risk of fraud EZ-R Stats, LLC
Risk Assessment
Periodic review and assessment of potential schemes and events
Need to mitigate risk
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Managing the business risk of fraud EZ-R Stats, LLC
Fraud Prevention
Establish prevention techniques Mitigate possible impact on the organization
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Managing the business risk of fraud EZ-R Stats, LLC
Fraud Detection
Establish detection techniques for fraud “Back stop” where preventive measures fail,
or Unmitigated risks are realized
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Managing the business risk of fraud EZ-R Stats, LLC
Fraud Investigation and Corrective Action
Reporting process to solicit input on fraud Coordinated approach to investigation Use of corrective action
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Managing the business risk of fraud EZ-R Stats, LLC
“60 Minutes” – “World of Trouble”
2/15/09 – Scott Pelley– Fraud Risk Governance – “one grand wink-wink,
nod-nod “– Fraud Risk Assessment - categorically false – Fraud Prevention – “my husband passed away”– Fraud Detection - We didn't know? Never saw one.– Fraud Investigation and corrective action - Pick-A-
Payment losses $36 billion
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Managing the business risk of fraud EZ-R Stats, LLC
Section 4 – Fraud Detection Detective Controls Process Controls Anonymous Reporting Internal Auditing Proactive Fraud Detection
Objective 1b
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Managing the business risk of fraud EZ-R Stats, LLC
Proactive Fraud Detection
Data Analysis to identify:– Anomalies– Trends– Risk indicators
Objective 1b
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Managing the business risk of fraud EZ-R Stats, LLC
Fraud Detective Controls
Operate in the background Not evident in everyday business
environment These techniques usually –
– Occur in ordinary course of business– Corroboration using external information– Automatically communicate deficiencies– Use results to enhance other controls
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Managing the business risk of fraud EZ-R Stats, LLC
Examples of detective controls
Whistleblower hot-lines (DHHS and OSA have them)
Process controls (Medicaid audits and edits) Proactive fraud detection procedures
– Data analysis– Continuous monitoring– Benford’s Law
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Managing the business risk of fraud EZ-R Stats, LLC
Specific Examples Cited
Journal entries – suspicious transactions
Identification of relationships Benford’s Law Continuous monitoring
Objective 1b
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Managing the business risk of fraud EZ-R Stats, LLC
Data Analysis enhances ability to detect fraud
Identify hidden relationships Identify suspicious transactions Assess effectiveness of internal
controls Monitor fraud threats Analyze millions of transactions
Objective 1b
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Managing the business risk of fraud EZ-R Stats, LLC
Continuous Monitoring of Fraud Detection
Organization should develop ongoing monitoring and measurements
Establish measurement criteria (and communicate to Board)
Measurable criteria include:
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Managing the business risk of fraud EZ-R Stats, LLC
Measurable Criteria – number of
fraud allegations fraud investigations resolved Employees attending annual ethics course Whistle blower allegations Messages supporting ethical behavior
delivered by executives Vendors signing ethical behavior standards
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Managing the business risk of fraud EZ-R Stats, LLC
Management ownership of each technique implemented
Each process owner should:– Evaluate effectiveness of technique regularly– Adjust technique as required– Document adjustments– Report modifications needed for techniques which
become less effective
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Managing the business risk of fraud EZ-R Stats, LLC
Practice Advisory 2320-1Analysis and Evaluation
International standards for the professional practice of Internal Auditing
Analytical audit procedures– Efficient and effective– Useful in detecting
Differences that are not expected Potential errors Potential irregularities
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Managing the business risk of fraud EZ-R Stats, LLC
Analytical Audit Procedures
May include– Study of relationships– Comparison of amounts with
similar information in the organization
– Comparison of amounts with similar information in the industry
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Managing the business risk of fraud EZ-R Stats, LLC
Analytical audit procedures
Performed using monetary amounts, physical quantities, ratios or percentages
Ratio, trend and regression analysis Period to period comparisons Auditors should use analytical audit
procedures in planning the engagement
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Managing the business risk of fraud EZ-R Stats, LLC
Factors to consider
Significance of the area being audited Assessment of risk Adequacy of system of internal control Availability and reliability of information Extent to which procedures provide support
for engagement results
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Managing the business risk of fraud EZ-R Stats, LLC
Peeling the Onion
Population as Whole
Possible Error Conditions
Fraud Items
Objective 1c
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Managing the business risk of fraud EZ-R Stats, LLC
Fraud Pattern Detection
Market Basket
Stratification
Trend Line
Holiday
Day of Week
Duplicates
Univariate
Gaps
Benford’s Law
Round Numbers
Target Group
Objective 1d
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Managing the business risk of fraud EZ-R Stats, LLC
Digital Analysis (5W)
WhoWhatWhyWhereWhen
Objective 1e
A little about the basics of digital analysis….
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Managing the business risk of fraud EZ-R Stats, LLC
Who Uses Digital Analysis
Traditionally, IT specialists With appropriate tools, audit
generalists (CAATs) Growing trend of business
analytics Essential component of
continuous monitoring
Objective 1e
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Managing the business risk of fraud EZ-R Stats, LLC
What - Digital Analysis
Using software to:– Classify– Quantify– Compare
Both numeric and non-numeric data
Objective 1e
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Managing the business risk of fraud EZ-R Stats, LLC
How - Assessing fraud risk
Basis is quantification Software can do the “leg work” Statistical measures of difference
– Chi square– Kolmogorov-Smirnov– D-statistic
Specific approaches
Objective 1e
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Managing the business risk of fraud EZ-R Stats, LLC
Why - Advantages
Automated process Handle large data populations Objective, quantifiable metrics Can be part of continuous monitoring Can produce useful business analytics 100% testing is possible Quantify risk Repeatable process
Objective 1e
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Managing the business risk of fraud EZ-R Stats, LLC
Why - Disadvantages
Costly (time and software costs) Learning curve Requires specialized knowledge
Objective 1e
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Managing the business risk of fraud EZ-R Stats, LLC
When to Use Digital Analysis
Traditional – intermittent (one off) Trend is to use it as often as possible Continuous monitoring Scheduled processing
Objective 1e
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Managing the business risk of fraud EZ-R Stats, LLC
Where Is It Applicable?
Any organization with data in digital format, and especially if:– Volumes are large– Data structures are complex– Potential for fraud exists
Objective 1e
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Managing the business risk of fraud EZ-R Stats, LLC
Disadvantages of digital analysis
Cost– Software– Training– Skills not widely available
Time consuming– Development costs– Testing resources
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Managing the business risk of fraud EZ-R Stats, LLC
Objective 1 Summarized
Three brief examples CFE Guidance Paper “Top 10” Metrics Process Overview Who, What, Why, When & Where
Objective 1
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Managing the business risk of fraud EZ-R Stats, LLC
Objective 1 - Summarized
Understand the framework for managing the business risk of fraud
Plan, perform and explain statistical sampling in audits Reduce audit costs using data mining, sequential
sampling and other sampling techniques Apply SAS 56, the new SAS suite and the revised (2007)
Yellow Book. Run, hands-on, the most productive analytic technique
(regression analysis). Use data mining to introduce greater efficiency into the
audit process, without losing effectiveness.
Next is plan, perform …
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Managing the business risk of fraud EZ-R Stats, LLC
Statistical Sampling
Brief History / Timeline Overview Attribute Sampling – Compliance Variable Sampling – Numeric Estimates
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Managing the business risk of fraud EZ-R Stats, LLC
History of Sampling
Basis is two laws/theorems of probability Law of Large Numbers Central Limit Theorem
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Managing the business risk of fraud EZ-R Stats, LLC
Law of large numbers
Simulated rolling of dice
0
1
2
3
4
5
6
7
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85
Observation
Valu
e Result
Average
Linear (Result)
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Managing the business risk of fraud EZ-R Stats, LLC
Time Line - LLN
Indian mathematician Bramagupta 600 AD Italian mathematician Cardon 1500’s
Statement without proof that empirical statistics improve with more trials
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Managing the business risk of fraud EZ-R Stats, LLC
Time line LLN (continued)
Jacob Bernoulli first to prove in 1713 Foundation for central limit theorem
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Managing the business risk of fraud EZ-R Stats, LLC
Central limit theorem
Classic measure
Mean of a sufficiently large number of random samples will be approximately normally distributed.
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Managing the business risk of fraud EZ-R Stats, LLC
The traditional explanation
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Managing the business risk of fraud EZ-R Stats, LLC
Central Limit Theorem
See it in action today Any population Large number of samples Average is “normally” distributed
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Managing the business risk of fraud EZ-R Stats, LLC
History of Central Limit Theorem
French mathematician Abraham de Moivre
1733 – approximate distribution from tossing coin (heads/tails)
Ho hum reaction French Mathematician
LaPlace – expanded it Ho hum reaction
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Managing the business risk of fraud EZ-R Stats, LLC
History of CLT (cont’d)
Russian mathematician Lyapunov
Proof in 1901 Same reaction
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Managing the business risk of fraud EZ-R Stats, LLC
Industrial revolution
Manufacturing
Engineering
Excitement!
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Managing the business risk of fraud EZ-R Stats, LLC
Student’s T
William Gosset - 1908
Guinness Brewery
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Managing the business risk of fraud EZ-R Stats, LLC
SAS 39
Effective June, 1983 Exposure draft for
revision in 2009
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Managing the business risk of fraud EZ-R Stats, LLC
Attribute sampling
Buonaccorsi (1987) Refined calculations Few software packages use it
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Managing the business risk of fraud EZ-R Stats, LLC
Overview
Sample size calculations Attribute sampling Variable sampling Random number generators
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Managing the business risk of fraud EZ-R Stats, LLC
Sample size calculation
It’s a guess… Every package – different
answer Need to know the
population But that’s why you’re
taking a sample!
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Managing the business risk of fraud using sampling and data mining EZ-R Stats, LLC
Attribute Sampling
Using RAT-STATS
Unrestricted populations
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Managing the business risk of fraud EZ-R Stats, LLC
Session Objectives
1. Understand what is attribute sampling and when to use it
2. Understand unrestricted populations
3. Overview of the process using RAT-STATS
4. Understand the formula behind the computations
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Managing the business risk of fraud EZ-R Stats, LLC
Attribute sampling
“Attribute”Compliance testingSignatures on approval
documents, attachment of supporting documentation, etc.
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Managing the business risk of fraud EZ-R Stats, LLC
Statistical approach
RecommendedEconomicalEfficientRequires determination of a
sample size
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Managing the business risk of fraud EZ-R Stats, LLC
Overview of process
Determine the sampling objective– Confidence– Precision
Determine required sample size Identify samples to be selected based upon random
numbers Pull the sample and test Compute the sampling results (i.e. estimate of range)
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Managing the business risk of fraud EZ-R Stats, LLC
How this is done in RAT-STATS
The sampling parameters are first developed by the auditor
RAT-STATS is used to compute sample size RAT-STATS used to generate random
numbers Pull the sample and test Enter results in RAT-STATS to compute
estimates
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Managing the business risk of fraud EZ-R Stats, LLC
Step 1 – Develop sampling parameters
1. Size of population
2. Expected error rate
3. Required confidence
4. Required precision
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Managing the business risk of fraud EZ-R Stats, LLC
Step 2 – Obtain the random numbers
Done by entering info into RAT-STATS Output can be a variety of sources:
– Text File– Excel– Microsoft Access– Print File
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Managing the business risk of fraud EZ-R Stats, LLC
Step 3 – Pull the sample
Each random number selected corresponds with an item
Put the selected item on a separate schedule
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Managing the business risk of fraud EZ-R Stats, LLC
Step 4 - Test each selected item
Generally requires reviewing documents
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Managing the business risk of fraud EZ-R Stats, LLC
Step 5 – Compute the results
Enter summary information into RAT-STATS Output can be in a variety of formats:
– Excel– Microsoft Access– Text File– Print File– Printer
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Managing the business risk of fraud EZ-R Stats, LLC
That’s It!
Now we’ll see an actual demo using the RAT-STATS software
Excel population of 5,000 invoices Results of test of attributes stored in the
worksheet
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Managing the business risk of fraud using sampling and data mining EZ-R Stats, LLC
Variable Sampling
Using RAT-STATS
Unrestricted populations
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Managing the business risk of fraud EZ-R Stats, LLC
Session Objectives
1. Understand what variable sampling is and when to use it
2. Understand unrestricted populations
3. Overview of the process using RAT-STATS
4. Understand the formula behind the computations
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Managing the business risk of fraud EZ-R Stats, LLC
Variable sampling
“Variable”Estimating account balancesEstimating transaction totals
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Managing the business risk of fraud EZ-R Stats, LLC
Statistical approach
RecommendedEconomicalEfficientRequires determination of a
sample size
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Managing the business risk of fraud EZ-R Stats, LLC
Overview of process
Determine the sampling objective– Confidence– Precision
Determine required sample size Identify samples to be selected based upon random
numbers Pull the sample and test Compute the sampling results (i.e. estimate of range)
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Managing the business risk of fraud EZ-R Stats, LLC
How this is done in RAT-STATS
The sampling parameters are first developed by the auditor
RAT-STATS is used to compute sample size RAT-STATS used to generate random
numbers Pull the sample and test Enter results in RAT-STATS to compute
estimates
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Managing the business risk of fraud EZ-R Stats, LLC
Step 1 – Develop sampling parameters
1. Probe sample
2. Statistical measure
3. Excel formula
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Managing the business risk of fraud EZ-R Stats, LLC
Step 1 – Develop sampling parameters
1. Size of population
2. Average value
3. Standard deviation
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Managing the business risk of fraud EZ-R Stats, LLC
Step 2 – Obtain the random numbers
Done by entering info into RAT-STATSOutput can be a variety of sources:
– Text File– Excel– Microsoft Access– Print File
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Managing the business risk of fraud EZ-R Stats, LLC
Step 3 – Pull the sample
Each random number selected corresponds with an item
Put the selected item on a separate schedule
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Managing the business risk of fraud EZ-R Stats, LLC
Step 4 - Test each selected item
Generally requires reviewing documents
Example data contains both “examined” and “audited” value.
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Managing the business risk of fraud EZ-R Stats, LLC
Step 5 – Compute the results
Enter summary information into RAT-STATS Output can be in a variety of formats:
– Excel– Microsoft Access– Text File– Print File– Printer
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Managing the business risk of fraud EZ-R Stats, LLC
That’s It!
Now we’ll see an actual demo using the RAT-STATS software
Excel population of 5,000 invoicesAudited values stored in the
worksheet
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Managing the business risk of fraud using sampling and data mining EZ-R Stats, LLC
Attribute Sampling
Using RAT-STATS
Stratified populations
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Managing the business risk of fraud EZ-R Stats, LLC
Session Objectives
1. Understand what is stratification and when to use it
2. Overview of the process using RAT-STATS
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Managing the business risk of fraud EZ-R Stats, LLC
Stratified sampling
“Strata”HomogenousMore efficient in some instances
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Managing the business risk of fraud EZ-R Stats, LLC
Overview of process
Separation into strata Determine the sampling objective
– Confidence– Precision
Determine required sample size Identify samples to be selected based upon random
numbers Pull the sample and test Compute the sampling results (i.e. estimate of range)
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Managing the business risk of fraud EZ-R Stats, LLC
How this is done in RAT-STATS
The sampling parameters are first developed by the auditor
RAT-STATS is used to compute sample size RAT-STATS used to generate random
numbers Pull the sample and test Enter results in RAT-STATS to compute
estimates
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Managing the business risk of fraud EZ-R Stats, LLC
Step 1 – Develop sampling parameters
1. Size of population
2. Expected error rate
3. Required confidence
4. Required precision
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Managing the business risk of fraud EZ-R Stats, LLC
Step 2 – Obtain the random numbers
Done by entering info into RAT-STATS Output can be a variety of sources:
– Text File– Excel– Microsoft Access– Print File
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Managing the business risk of fraud EZ-R Stats, LLC
Step 3 – Pull the sample
Each random number selected corresponds with an item
Put the selected item on a separate schedule
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Managing the business risk of fraud EZ-R Stats, LLC
Step 4 - Test each selected item
Generally requires reviewing documents
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Managing the business risk of fraud EZ-R Stats, LLC
Step 5 – Compute the results
Enter summary information into RAT-STATS Output can be in a variety of formats:
– Excel– Microsoft Access– Text File– Print File– Printer
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Managing the business risk of fraud EZ-R Stats, LLC
That’s It!
Now we’ll see an actual demo using the RAT-STATS software
Excel population of 5,000 invoices Results of test of attributes stored in the
worksheet
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Managing the business risk of fraud using sampling and data mining EZ-R Stats, LLC
Variable Sampling
Using RAT-STATS
Stratified populations
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Managing the business risk of fraud EZ-R Stats, LLC
Session Objectives
1. Understand what stratified sampling is and when to use it
2. Populations benefiting from stratified sampling
3. Overview of the process using RAT-STATS
4. Understand the formula behind the computations
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Managing the business risk of fraud EZ-R Stats, LLC
Stratified variable sampling
“Stratified”“Variable”Estimating amountsNarrower standard deviation
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Managing the business risk of fraud EZ-R Stats, LLC
Overview of process
Determine the sampling objective– Confidence– Precision
Determine required sample size Identify samples to be selected based upon random
numbers Pull the sample and test Compute the sampling results (i.e. estimate of range)
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Managing the business risk of fraud EZ-R Stats, LLC
How this is done in RAT-STATS
The sampling parameters are first developed by the auditor
RAT-STATS is used to compute sample size RAT-STATS used to generate random
numbers Pull the sample and test Enter results in RAT-STATS to compute
estimates
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Managing the business risk of fraud EZ-R Stats, LLC
Step 1 – Develop sampling parameters
1. Probe sample
2. Statistical measure
3. Excel formula
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Managing the business risk of fraud EZ-R Stats, LLC
Step 1 – Develop sampling parameters
1. Number of strata
2. Size of population
3. Average value
4. Standard deviation
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Managing the business risk of fraud EZ-R Stats, LLC
Step 2 – Obtain the random numbers
Done by entering info into RAT-STATS Multi-stage random numbers Output can be a variety of sources:
– Text File– Excel– Microsoft Access– Print File
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Managing the business risk of fraud EZ-R Stats, LLC
Step 3 – Pull the sample
Each random number selected corresponds with an item in a strata
Put the selected item on a separate schedule
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Managing the business risk of fraud EZ-R Stats, LLC
Step 4 - Test each selected item
Generally requires reviewing documents
Example data contains both “examined” and “audited” value.
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Managing the business risk of fraud EZ-R Stats, LLC
Step 5 – Compute the results
Enter summary information into RAT-STATS Output can be in a variety of formats:
– Excel– Microsoft Access– Text File– Print File– Printer
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Managing the business risk of fraud EZ-R Stats, LLC
That’s It!
Now we’ll see an actual demo using the RAT-STATS software
Excel population of 5,000 invoicesDivided into three strataAudited values stored in the
worksheet
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Managing the business risk of fraud EZ-R Stats, LLC
Objective 2 - Summarized
Understand the framework for managing the business risk of fraud Plan, perform and explain statistical sampling in audits Reduce audit costs using data mining, sequential sampling and
other sampling techniques Apply SAS 56, the new SAS suite and the revised (2007) Yellow
Book. Run, hands-on, the most productive analytic technique (regression
analysis). Use data mining to introduce greater efficiency into the audit
process, without losing effectiveness.
Next is cost reduction …
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Managing the business risk of fraud EZ-R Stats, LLC
Techniques for cost reduction
Optimize sample size (most “bang” for the buck)
Skip sampling – review 100% of transactions using computer assisted audit techniques (CAATs)
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Managing the business risk of fraud EZ-R Stats, LLC
Sample optimization
Sequential sampling
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Managing the business risk of fraud EZ-R Stats, LLC
University of Hawaii
Banana aphids
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Managing the business risk of fraud EZ-R Stats, LLC
Sequential sampling
Banana aphids
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Managing the business risk of fraud EZ-R Stats, LLC
100% test using CAATs
Provides complete coverage Best practice Basis for continuous monitoring Repeatable process
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Managing the business risk of fraud EZ-R Stats, LLC
Objective 3 - Summarized
Understand the framework for managing the business risk of fraud
Plan, perform and explain statistical sampling in audits Reduce audit costs using data mining, sequential sampling and
other sampling techniques Apply SAS 56, the new SAS suite and the revised (2007)
Yellow Book. Run, hands-on, the most productive analytic technique
(regression analysis). Use data mining to introduce greater efficiency into the audit
process, without losing effectiveness.
Next is Yellow Book and SAS 56 …
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Managing the business risk of fraud EZ-R Stats, LLC
Yellow book standards
Standards regarding statistical sampling and IT
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Managing the business risk of fraud EZ-R Stats, LLC
General standards
3.43 Technical Knowledge and competence
“The staff assigned to conduct an audit or attestation engagement under GAGAS must collectively possess the technical knowledge, skills, and experience necessary to be competent for the type of work being performed before beginning work on that assignment.
The staff assigned to a GAGAS audit or attestation engagement should collectively possess: “
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Managing the business risk of fraud EZ-R Stats, LLC
Stat sampling and IT
Skills appropriate for the work being performed. For example, staff or specialist skills in
(1) statistical sampling if the work involves use of statistical sampling;
(2) information technology
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Managing the business risk of fraud EZ-R Stats, LLC
SAS 56 – Analytical procedures
Requires use of analytic review procedures for:
Audit planning Overall review stages
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Managing the business risk of fraud EZ-R Stats, LLC
SAS 56 – Analytical Review
Encourages use of analytical review Provides guidance
“A wide variety of analytical procedures may be useful for this purpose.”
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Managing the business risk of fraud EZ-R Stats, LLC
Objective 4 - Summarized
Understand the framework for managing the business risk of fraud
Plan, perform and explain statistical sampling in audits Reduce audit costs using data mining, sequential sampling and
other sampling techniques Apply SAS 56, the new SAS suite and the revised (2007)
Yellow Book. Run, hands-on, the most productive analytic technique
(regression analysis). Use data mining to introduce greater efficiency into the audit
process, without losing effectiveness.
Next is linear regression …
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Managing the business risk of fraud EZ-R Stats, LLC
Next Metric
1. Outliers
2. Stratification
3. Day of Week
4. Round Numbers
5. Made Up Numbers
6. Market basket
7. Trends
8. Gaps
9. Duplicates
10. Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Trend BustersDoes the pattern make sense?
ACME Technology
05,000
10,00015,00020,00025,00030,000
Date
Am
ount Sales
Employee Count
7 - Trends
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Managing the business risk of fraud EZ-R Stats, LLC
Trend Busters
Linear regression Sales are up, but cost of goods sold is
down “Spikes”
7 – Trends
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Managing the business risk of fraud EZ-R Stats, LLC
Purpose / Type of Errors
Identify trend lines, slopes, etc.
Correlate trends Identify anomalies Key punch errors where
amount is order of magnitude
7 – Trends
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Managing the business risk of fraud EZ-R Stats, LLC
Linear Regression
Test relationships (e.g. invoice amount and sales tax)
Perform multi-variable analysis
7 – Trends
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Managing the business risk of fraud EZ-R Stats, LLC
How is it done?
Estimate linear trends using “best fit”
Measure variability (standard errors)
Measure slope Sort descending by slope,
variability, etc.
7 – Trends
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Managing the business risk of fraud EZ-R Stats, LLC
Trend Lines by Account - Example Results
Generally the trend is gently sloping up, but two accounts (43870 and 54630) are different.
Account N Slope Std Err
32451 18 1.230 0.87
43517 17 1.070 4.3
32451 27 1.023 0.85
43517 32 1.010 0.36
43870 23 0.340 2.36
54630 56 -0.560 1.89
7 – Trends
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Managing the business risk of fraud EZ-R Stats, LLC
Scatter plot with prediction and confidence intervals
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Managing the business risk of fraud EZ-R Stats, LLC
Objective 5 - Summarized
Understand the framework for managing the business risk of fraud
Plan, perform and explain statistical sampling in audits Reduce audit costs using data mining, sequential sampling and
other sampling techniques Apply SAS 56, the new SAS suite and the revised (2007)
Yellow Book. Run, hands-on, the most productive analytic technique
(regression analysis). Use data mining to introduce greater efficiency into the audit
process, without losing effectiveness.
Next is data mining …
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Managing the business risk of fraud EZ-R Stats, LLC
Basis for Pattern Detection
Analytical review Isolate the “significant few” Detection of errors Quantified approach
Objective 6
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Managing the business risk of fraud EZ-R Stats, LLC
Understanding the Basis
Quantified Approach Population vs. Groups Measuring the Difference Stat 101 – Counts, Totals, Chi
Square and K-S The metrics used
Objective 2
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Managing the business risk of fraud EZ-R Stats, LLC
Quantified Approach
Based on measureable differences
Population vs. Group“Shotgun” technique
Objective 2a
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Managing the business risk of fraud EZ-R Stats, LLC
Detection of Fraud Characteristics
Something is different than expected
Objective 2a
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Managing the business risk of fraud EZ-R Stats, LLC
Fraud patterns
Common theme – “something is different”
GroupsGroup pattern is different than
overall population
Objective 2b
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Managing the business risk of fraud EZ-R Stats, LLC
Measurement Basis
Transaction counts
Transaction amounts
Objective 2c
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Managing the business risk of fraud EZ-R Stats, LLC
A few words about statistics (the “s” word)
Detailed knowledge of statistics not necessary
Software packages do the “number-crunching”
Statistics used only to highlight potential errors/frauds
Not used for quantification
Objective 2d
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Managing the business risk of fraud EZ-R Stats, LLC
How is digital analysis done?
Comparison of group with population as a whole
Can be based on either counts or amounts Difference is measured Groups can then be ranked using a selected
measure High difference = possible error/fraud
Objective 2d
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Managing the business risk of fraud EZ-R Stats, LLC
Demo in Excel of the process
Based roughly on the Wake County Transportation fraud
Illustrates how the process works, using Excel
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Managing the business risk of fraud EZ-R Stats, LLC
Histograms
Attributes tallied and categorized into “bins” Counts or sums of amounts
Objective 2d
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Managing the business risk of fraud EZ-R Stats, LLC
Two histograms obtained
Population and groupPopulation
0
100
200
300
400
500
600
700
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Group
01020304050607080
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Objective 2d
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Managing the business risk of fraud EZ-R Stats, LLC
Compute Cumulative Amount for each
Count by Month
0
10
20
30
40
50
60
70
80
Month
Cou
nt
Cum Pct
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep-0
7
Nov-0
7
Objective 2d
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Managing the business risk of fraud EZ-R Stats, LLC
Are the histograms different?
Two statistical measures of difference
Chi Squared (counts) K-S (distribution) Both yield a difference metric
Objective 2d
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Managing the business risk of fraud EZ-R Stats, LLC
Chi Squared
Classic test on data in a table Answers the question – are the
rows/columns different Some limitations on when it can be
applied
Objective 2d
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Chi Squared
Table of Counts Degrees of Freedom Chi Squared Value P-statistic Computationally intensive
Objective 2d
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Kolmogorov-Smirnov
Two Russian mathematicians
Comparison of distributionsMetric is the “d-statistic”
Objective 2d
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How is K-S test done?
Four step process
1. For each cluster element determine percentage
2. Then calculate cumulative percentage
3. Compare the differences in cumulative percentages
4. Identify the largest difference
Objective 2d
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Kolmogorov-Smirnov
Objective 2d - KS
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Managing the business risk of fraud EZ-R Stats, LLC
Classification by metrics
Stratification Day of week Happens on holiday Round numbers Variability Benford’s Law Trend lines Relationships (market basket) Gaps Duplicates
Objective 2e
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Managing the business risk of fraud EZ-R Stats, LLC
Auditor’s “Top 10” Metrics
1. Outliers / Variability
2. Stratification
3. Day of Week
4. Round Numbers
5. Made Up Numbers
6. Market basket
7. Trends
8. Gaps
9. Duplicates
10. Dates
Objective e
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Managing the business risk of fraud EZ-R Stats, LLC
Understanding the Basis
Quantified Approach Population vs. Groups Measuring the Difference Stat 101 – Counts, Totals, Chi Square
and K-S The metrics used
Objective 2
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Managing the business risk of fraud EZ-R Stats, LLC
Objective 2 - Summarized
1. Understand why and how 2. Understand statistical basis for quantifying
differences3. Identify ten general tools and techniques4. Understand examples done using Excel5. How pattern detection fits in
Next are the metrics …
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It’s that time!
Session Break!
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The “Top 10” Metrics
Overview Explain Each Metric Examples of what it can detect How to assess results
Objective 3
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Trapping anomalies
Objective 3
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Managing the business risk of fraud EZ-R Stats, LLC
Fraud Pattern Detection
Market Basket
Stratification
Trend Line
Holiday
Day of Week
Duplicates
Univariate
Gaps
Benford’s Law
Round Numbers
Target Group
Objective 3
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Outliers / Variability
Outliers are amounts which are significantly different from the rest of the population
1 - Outliers
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Outliers / Variability
Charting (visual) Software to analyze “z-scores” Top and Bottom 10, 20 etc. High and low variability (coefficient
of variation)
1 - Outliers
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Managing the business risk of fraud EZ-R Stats, LLC
Drill down to the group level
Basic statistics– Minimum, maximum
and average– Variability
Sort by statistic of interest– Variability (coefficient
of variation)– Maximum, etc.
1 - Outliers
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Managing the business risk of fraud EZ-R Stats, LLC
Example Results
Provider N Coeff Var
3478421 3,243 342.23
2356721 4,536 87.23
3546789 3,421 23.25
5463122 2,311 18.54
Two providers (3478421 and 2356721) had significantly more variability in the amounts of their claims than all the rest.
1 - Outliers
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Next Metric
1. Outliers
2. Stratification
3. Day of Week
4. Round Numbers
5. Made Up Numbers
6. Market basket
7. Trends
8. Gaps
9. Duplicates
10. Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Unusual stratification patterns
Do you know how your data
looks?
2 - Stratification
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Stratification - How
Charting (visual)Chi SquaredKolmogorov-SmirnovBy groups
2 - Stratification
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Managing the business risk of fraud EZ-R Stats, LLC
Purpose / types of errors
Transactions out of the ordinary “Up-coding” insurance claims “Skewed” groupings Based on either count or amount
2 – Stratification
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Managing the business risk of fraud EZ-R Stats, LLC
The process?
1. Stratify the entire population into “bins” specified by auditor
2. Same stratification on each group (e.g. vendor)
3. Compare the group tested to the population
4. Obtain measure of difference for each group
5. Sort descending on difference measure
2 – Stratification
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Managing the business risk of fraud EZ-R Stats, LLC
Units of Service Stratified - Example Results
Two providers (2735211 and 4562134) are shown to be much different from the overall population (as measured by Chi Square).
Provider N Chi Sq D-stat
2735211 6,011 7,453 0.8453
4562134 8,913 5,234 0.7453
4321089 3,410 342 0.5231
4237869 2,503 298 0.4632
2 – Stratification
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Managing the business risk of fraud EZ-R Stats, LLC
Next Metric
1. Outliers
2. Stratification
3. Day of Week
4. Round Numbers
5. Made Up Numbers
6. Market basket
7. Trends
8. Gaps
9. Duplicates
10. Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Day of Week
Activity on weekdays Activity on weekends Peak activity mid to late week
3 – Day of Week
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Managing the business risk of fraud EZ-R Stats, LLC
Purpose / Type of Errors
Identify unusually high/low activity on one or more days of week
Dentist who only handled Medicaid on Tuesday
Office is empty on Friday
3 – Day of Week
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Managing the business risk of fraud EZ-R Stats, LLC
How it is done?
Programmatically check entire population Obtain counts and sums by day of week
(1-7) Prepare histogram For each group do the same procedure Compare the two histograms Sort descending by metric (chi square/d-
stat)
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Managing the business risk of fraud EZ-R Stats, LLC
Day of Week - Example Results
Provider 2735211 only provided service for Medicaid on Tuesdays. Provider 4562134 was closed on Thursdays and Fridays.
Provider N Chi Sq D-stat
2735211 5,404 12,435 0.9802
4562134 5,182 7,746 0.8472
4321089 5,162 87 0.321
4237869 7,905 56 0.2189
3 – Day of Week
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Managing the business risk of fraud EZ-R Stats, LLC
Next Metric
1. Outliers
2. Stratification
3. Day of Week
4. Round Numbers
5. Made Up Numbers
6. Market basket
7. Trends
8. Gaps
9. Duplicates
10. Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Round Numbers
It’s about….
Estimates!
4 – Round Numbers
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Managing the business risk of fraud EZ-R Stats, LLC
Purpose / Type of Errors
Isolate estimates Highlight account numbers in
journal entries with round numbers
Split purchases (“under the radar”) Which groups have the most
estimates
4 – Round Numbers
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Managing the business risk of fraud EZ-R Stats, LLC
Round numbers
Classify population amounts– $1,375.23 is not round– $5,000 is a round number – type 3 (3
zeros)– $10,200 is a round number type 2 (2
zeros) Quantify expected vs. actual (d-statistic) Generally represents an estimate Journal entries
4 – Round Numbers
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Managing the business risk of fraud EZ-R Stats, LLC
Round Numbers in Journal Entries - Example Results
Two accounts, 2735211 and 4562134 have significantly more round number postings than any other posting account in the journal entries.
Account N Chi Sq D-stat
2735211 4,136 54,637 0.9802
4562134 833 35,324 0.97023
4321089 8,318 768 0.321
4237869 9,549 546 0.2189
4 – Round Numbers
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Managing the business risk of fraud EZ-R Stats, LLC
Next Metric
1. Outliers
2. Stratification
3. Day of Week
4. Round Numbers
5. Made Up Numbers
6. Market basket
7. Trends
8. Gaps
9. Duplicates
10. Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Made up Numbers
Curb stoning
Imaginary numbers Benford’s Law
5 – Made up numbers
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Managing the business risk of fraud EZ-R Stats, LLC
What can be detected
Made up numbers – e.g. falsified inventory counts, tax return schedules
5 – Made Up Numbers
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Managing the business risk of fraud EZ-R Stats, LLC
Benford’s Law using Excel
Basic formula is “=log(1+(1/N))” Workbook with formulae available at
http://tinyurl.com/4vmcfs Obtain leading digits using “Left”
function, e.g. left(Cell,1)
5 – Made Up Numbers
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Made up numbers
Benford’s Law Check Chi Square and d-statistic First 1,2,3 digits Last 1,2 digits Second digit Sources for more info
5 – Made Up Numbers
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Managing the business risk of fraud EZ-R Stats, LLC
How is it done?
Decide type of test – (first 1-3 digits, last 1-2 digit etc)
For each group, count number of observations for each digit pattern
Prepare histogram Based on total count, compute expected
values For the group, compute Chi Square and d-
stat Sort descending by metric (chi square/d-stat)
5 – Made Up Numbers
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Managing the business risk of fraud EZ-R Stats, LLC
Invoice Amounts tested with Benford’s law - Example Results
During tests of invoices by store, two stores, 324 and 563 have significantly more differences than any other store as measured by Benford’s Law.
Store Hi Digit Chi Sq D-stat
324 79 5,234 0.9802
563 89 4,735 0.97023
432 23 476 0.321
217 74 312 0.2189
5 – Made Up Numbers
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Managing the business risk of fraud EZ-R Stats, LLC
Next Metric
1. Outliers
2. Stratification
3. Day of Week
4. Round Numbers
5. Made Up Numbers
6. Market basket
7. Trends
8. Gaps
9. Duplicates
10. Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Market Basket
Medical “Ping ponging” Pattern associations Apriori program References at end of slides Apriori – Latin a (from) priori
(former) Deduction from the known
6 – Market Basket
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Managing the business risk of fraud EZ-R Stats, LLC
Purpose / Type of Errors
Unexpected patterns and associations
Based on “market basket” concept Unusual combinations of diagnosis
code on medical insurance claim
6 – Market basket
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Managing the business risk of fraud EZ-R Stats, LLC
Market Basket
JE AccountsJE ApprovalsCredit card fraud in Japan –
taxi and ATM
6 – Market basket
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Managing the business risk of fraud EZ-R Stats, LLC
How is it done?
First, identify groups, e.g. all medical providers for a patient
Next, for each provider, assign a unique integer value
Create a text file containing the values
Run “apriori” analysis
6 – Market basket
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Managing the business risk of fraud EZ-R Stats, LLC
Apriori outputs
For each unique value, probability of other values
If you see Dr. Jones, you will also see Dr. Smith (80% probability)
If you see a JE to account ABC, there will also an entry to account XYZ (30%)
6 – Market basket
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Managing the business risk of fraud EZ-R Stats, LLC
Next Metric
1. Outliers
2. Stratification
3. Day of Week
4. Round Numbers
5. Made Up Numbers
6. Market basket
7. Trends
8. Gaps
9. Duplicates
10. Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Numeric Sequence Gaps
What’s there is interesting, what’s not there is critical …
8 - Gaps
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Managing the business risk of fraud EZ-R Stats, LLC
Purpose / Type of Errors
Missing documents (sales, cash, etc.)
Inventory losses (missing receiving reports)
Items that “walked off”
8 – Gaps
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Managing the business risk of fraud EZ-R Stats, LLC
How is it done?
Check any sequence of numbers supposed to be complete, e.g.
Cash receipts Sales slips Purchase orders
8 – Gaps
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Managing the business risk of fraud EZ-R Stats, LLC
Gaps Using Excel
Excel – sort and check Excel formula Sequential numbers and dates
8 – Gaps
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Managing the business risk of fraud EZ-R Stats, LLC
Gap Testing - Example Results
Four check numbers are missing.
Start End Missing
10789 10791 1
12523 12526 2
17546 17548 1
8 – Gaps
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Managing the business risk of fraud EZ-R Stats, LLC
Next Metric
1. Outliers
2. Stratification
3. Day of Week
4. Round Numbers
5. Made Up Numbers
6. Market basket
7. Trends
8. Gaps
9. Duplicates
10. Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Duplicates
Why is there more than one?
Same, Same, Same, and
Same, Same, Different
9 - Duplicates
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Managing the business risk of fraud EZ-R Stats, LLC
Two types of (related) tests
Same items – same vendor, same invoice number, same invoice date, same amount
Different items – same employee name, same city, different social security number
9 – Duplicates
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Managing the business risk of fraud EZ-R Stats, LLC
Duplicate Payments
High payback area“Fuzzy” logicOverriding software
controls
9 - Duplicates
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Managing the business risk of fraud EZ-R Stats, LLC
Fuzzy matching with software
Levenshtein distance Soundex “Like” clause in SQL Regular expression
testing in SQL Vendor/employee
situations
Russian physicist
9 - Duplicates
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Managing the business risk of fraud EZ-R Stats, LLC
How is it done?
First, sort file in sequence for testing
Compare items in consecutive rows
Extract exceptions for follow-up
9 - Duplicates
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Managing the business risk of fraud EZ-R Stats, LLC
Possible Duplicates - Example Results
Five invoices may be duplicates.
Vendor Invoice DateInvoice Amount Count
10245 6/15/2007 3,544.78 4
10245 8/31/2007 2,010.37 2
17546 2/12/2007 1,500.00 2
9 - Duplicates
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Managing the business risk of fraud EZ-R Stats, LLC
Next Metric
1. Outliers
2. Stratification
3. Day of Week
4. Round Numbers
5. Made Up Numbers
6. Market basket
7. Trends
8. Gaps
9. Duplicates
10. Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Date Checking
If we’re closed, why is there …
Adjusting journal entry?
Receiving report?
Payment issued?
10 - Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Holiday Date Testing
Red Flag indicator
10 – Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Date Testing challenges
Difficult to determine Floating holidays –
Friday, Saturday, Sunday, Monday
10 – Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Typical audit areas
Journal entries Employee expense
reports Business telephone calls Invoices Receiving reports Purchase orders
10 – Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Determination of Dates
Transactions when business is closed
Federal Office of Budget Management
An excellent fraud indicator in some cases
10 – Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Holiday Date Testing
Identifying holiday dates:– Error prone– Tedious
U.S. only
10 – Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Federal Holidays
Established by Law Ten dates Specific date (unless
weekend), OR Floating holiday
10 – Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Federal Holiday Schedule
Office of Personnel Management Example of specific date – Independence
Day, July 4th (unless weekend) Example of floating date – Martin Luther
King’s birthday (3rd Monday in January) Floating – Thanksgiving – 4th Thursday in
November
10 – Dates
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Managing the business risk of fraud EZ-R Stats, LLC
How it is done?
Programmatically count holidays for entire population
For each group, count holidays Compare the two histograms (group
and population) Sort descending by metric (chi
square/d-stat)
10 – Dates
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Managing the business risk of fraud EZ-R Stats, LLC
Holiday Counts - Example Results
Two employees (10245 and 32325) were “off the chart” in terms of expense amounts incurred on a Federal Holiday.
Employee Number N Chi Sq D-stat
10245 37 5,234 0.9802
32325 23 4,735 0.97023
17546 18 476 0.321
24135 34 312 0.2189
10 – Dates
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Managing the business risk of fraud EZ-R Stats, LLC
The “Top 10” Metrics
Overview Explain Each Metric Examples of what it can detect How to assess results
Objective 3
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Managing the business risk of fraud EZ-R Stats, LLC
Objective 3 - Summarized
1. Understand why and how 2. Understand statistical basis for quantifying
differences3. Identify ten general tools and techniques4. Understand examples done using Excel5. How pattern detection fits in
Next – using Excel …
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Managing the business risk of fraud EZ-R Stats, LLC
Use of Excel
Built-in functions Add-ins Macros Database access
Objective 4
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Managing the business risk of fraud EZ-R Stats, LLC
Excel templates
Variety of tests– Round numbers– Benford’s Law– Outliers– Etc.
Objective 4
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Managing the business risk of fraud EZ-R Stats, LLC
Excel – Univariate statistics
Work with Ranges =sum, =average, =stdevp =largest(Range,1),
=smallest(Range,1) =min, =max, =count Tools | Data Analysis | Descriptive
Statistics
Objective 4
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Managing the business risk of fraud EZ-R Stats, LLC
Excel Histograms
Tools | Data Analysis | Histogram Bin Range Data Range
Objective 4
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Managing the business risk of fraud EZ-R Stats, LLC
Excel Gaps testing
Sort by sequential value =if(thiscell-lastcell <>
1,thiscell-lastcell,0) Copy/paste special Sort
Objective 4
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Managing the business risk of fraud EZ-R Stats, LLC
Detecting duplicates with Excel
Sort by sort values =if testing =if(=and(thiscell=lastcell, etc.))
Objective 4
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Managing the business risk of fraud EZ-R Stats, LLC
Performing audit tests with macros
Repeatable process Audit standardization Learning curve Streamlining of tests More efficient and effective Examples -
http://ezrstats.com/Macros/home.html
Objective 4
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Managing the business risk of fraud EZ-R Stats, LLC
Using database audit software
Many “built-in” functions right off the shelf with SQL
Control totals Exception identification “Drill down” Quantification June 2008 article in the EDP Audit &
Control Journal (EDPACS) “SQL as an audit tool”
http://ezrstats.com/doc/SQL_As_An_Audit_Tool.pdf
Objective 4
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Managing the business risk of fraud EZ-R Stats, LLC
Use of Excel
Built-in functions Add-ins Macros Database access
Objective 4
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Managing the business risk of fraud EZ-R Stats, LLC
Objective 4 - Summarized
1. Understand why and how 2. Understand statistical basis for quantifying
differences3. Identify ten general tools and techniques4. Understand examples done using Excel5. How Pattern Detection fits in
Next – Fit …
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Managing the business risk of fraud EZ-R Stats, LLC
How Pattern Detection Fits In
Business Analytics Fraud Pattern Detection Continuous monitoring
Objective 5
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Managing the business risk of fraud EZ-R Stats, LLC
Where does Fraud Pattern Detection fit in?
Business Analytics Fraud Pattern Detection Continuous fraud pattern
detection Continuous Monitoring
Right in the middle
Objective 5
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Managing the business risk of fraud EZ-R Stats, LLC
Business Analytics
Fraud analytics -> business analytics
Business analytics -> fraud analytics
Objective 5
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Managing the business risk of fraud EZ-R Stats, LLC
Role in Continuous Monitoring (CM)
Fraud analytics can feed (CM) Continuous fraud pattern detection Use output from CM to tune fraud
pattern detection
Objective 5
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Managing the business risk of fraud EZ-R Stats, LLC
Objective 6 - Summarized
Understand the framework for managing the business risk of fraud
Plan, perform and explain statistical sampling in audits Reduce audit costs using data mining, sequential sampling and
other sampling techniques Apply SAS 56, the new SAS suite and the revised (2007)
Yellow Book. Run, hands-on, the most productive analytic technique
(regression analysis). Use data mining to introduce greater efficiency into the audit
process, without losing effectiveness.
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Managing the business risk of fraud EZ-R Stats, LLC
Links for more information
Kolmogorov-Smirnov http://tinyurl.com/y49sec Benford’s Law http://tinyurl.com/3qapzu Chi Square tests http://tinyurl.com/43nkdh Continuous monitoring
http://tinyurl.com/3pltdl
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Managing the business risk of fraud EZ-R Stats, LLC
Market Basket
Apriori testing for “ping ponging” Temple University
http://tinyurl.com/5vax7r Apriori program (“open source”)
http://tinyurl.com/5qehd5 Article – “Medical ping ponging”
http://tinyurl.com/5pzbh4
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Managing the business risk of fraud EZ-R Stats, LLC
Excel macros used in auditing
Excel as an audit software http://tinyurl.com/6h3ye7
Selected macros - http://ezrstats.com/Macros/home.html
Spreadsheets forever - http://tinyurl.com/5ppl7t
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Managing the business risk of fraud EZ-R Stats, LLC
Questions?
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Managing the business risk of fraud EZ-R Stats, LLC
Contact info
Phone: (919)-219-1622E-mail:
[email protected]: http://blog.ezrstats.com