mis 5208 week 2 fraud detection &...

Copyright©2015EdwardS.Ferrara

MIS 5208 – Week 2 F raud Detect ion &Prevention

EdFerrara,MSIA,[email protected]

Introductions,CourseOutline,andOtherAdministrationIssues


F raud Awareness & In ternal Contro ls

Awareness

UnderstandFraudSymptoms•Behaviors•Datasources

Alert• Fraudulentbehaviors

InternalControls

Operational&ControlEnvironment• SeparationofDuties•Accounttreatments•Cybersecurity controls

AssessRisk&Exposures

IdentifyPotentialDataSourcesforFraudDetection

FraudDetection


R isk Factors For F raud

FraudManagementEnvironment

CompetitiveBusiness

Environment

EmployeeRelationships

AttractiveAssets

InternalControls

Integrationofduties


F raud Exposure

FraudRiskAssessment• Riskassessmentisasometimesandcontroversialissue

• Wewillhaveanentiresectiononriskassessment

• Examinetherisksandexposurestoidentifyprocessandsystemweakness

DevelopCategoriesofRisk• Externalenvironment• Legal• Regulatory• Governance• Strategy• Operational• Information• Humanresources• Financial• Technology

DeterminingFraudExposure• Sourcesofrisk• Reviewexistingriskassessments• Reviewriskassessmentprocess• BusinessImpactAnalysts• Typesandsourcesoffraud

• Externalenvironment• Governance• Legal• Regulatory• Operational• Strategy


R isk Factors fo r F raudManagementEnvironment

UnrealisticFinancialTargets

UnrealisticPerformanceStandards

CorporateCulture–

EmphasizingWinAtAllCosts

Competitive&BusinessEnvironment

MisstatementofInventoryPositions

FraudulentOrders

Off BalanceSheet

Transactions

EmployeeRelationships Nepotism InsiderTrading Collusion

AttractiveAssets

IntellectualPropertyTheft

InsiderAbuseofPrivilege

CustomerContactCenter

Fraud

InternalControls

Inadequateinternalcontrols

Inventorymarkdowns

TradingPractices

SeparationofDuties

RelatedtoAbove ReducedStaff Fraud

Opportunity

Evaluate:Companyproductionfiguresforreasonableness, financialtargets,andmanagement’spositiononsame.

Evaluate:Recalculatethevalueofofinventory– ensuringitiscorrectlyvalued.

Evaluate:Lookfornepotism,matchingemployeeandvendoraddresses.

Evaluate:Monetizebothphysicalandinformationassetsforfinanciallybasedriskassessment.

Evaluate:Computersystemshavenecessary correspondingcontrols,privilegeduserabuseprotection,etc.

Evaluate:Ensurenecessarypolicies,procedures,guidelinesandstandardsareinplace.


F raud Schemes – AData Dr iven Approach

ControlWeaknessesApproach• Examinekeycontrols• Determinevulnerabilities• System• Process

KeyFields• Focusondataentry• Whichdatacanbechanged?

• Whatistheimpact?


ControlWeakness• Internal/Externalparties• Example:Receivedquantitylessthanorderedquantity–butpaymentmadeforfullamount

KeyFields• Datamanipulation• Privilegeduserabuse• Example:Createfictitiousvendors,changingaddressandbankaccount.


Case S tudy - Sunbeam


F raud Exposure Identif icat ion

Control Weakness Perpetrator Data Fields

Data Analysis(Tests)

ControlWeakness

DataofInterest


Key Data

VendorName,Address, BankInformation

Clerks&VendorDuplicatePayments,FictitiousVendors &

Payments

Vendorcreation,modification,

UnitPrices Clerk DirectPaymentsVendor

modification;systemlogfiles

Quantities ContractingOfficer,Vendor Kickbacks Invoicematching,

onorderquantity

TransactionAmounts

Clerk,vendor

Overpayment toobtainfundsor

kickbacks,overcharges

Invoicematching,contractamounts

Dates Clerk,vendor

Backdatepayment,duedates,backdatetoobtainearlier

payment

Invoicematching,invoiceandgoodsreceiveddate

Evaluate:Lookforblanksinkeyfields,lookforduplicatesinvendortable.

Evaluate:Lookfordisparitiesinunitpriceandcontractedprice.

Evaluate:Lookfordisparitiesbetweenorderedanddeliveredquantities.

Evaluate:Lookfordisparitiesbetweencontractandinvoiceamounts.

Evaluate:Lookfortransactionswhereinvoicedateislessthangoodreceipt.

Who Why Controls Test


Case S tudy – Conde Nast

http://www.forbes.com/sites/williampbarrett/2011/04/03/conde-nast-paid-8-million-to-scammer-who-sent- one-email/print/


FraudStandards


Invest igat ing F raud

Detectallmaterialerrorsandirregularities inthefinancialstatements

Discoverallillegalactscommittedbytheclient

Ensurethefinancialhealthoftheentity

Whichoftheseistrue?

Anauditwill:


Aud itors Respons ib i l i t ies

§ Errors- Unintentionalmisstatements§ Mistakesingatheringor

processingaccountingdata

§ Incorrectaccountingestimates

§ Mistakesintheapplicationofaccountingprinciples

§ Irregularities- Intentionalmisstatements,manipulation,falsification,oralterationofaccountingrecords&supportingdocuments§ Misrepresentationorintentionalomissionofevents,transactions,orothersignificantinformation

§ Intentionalmisapplicationofaccountingprinciples


So f tware AccountingS tandards

• Planandperform theaudittoprovidereasonable assurancethatfinancial statementsarefreeofmaterialmisstatementscausedbyerror orfraud.

SAS1and22

• Auditrisk,materiality andmisstatementsinfinancial statements

SAS47

• Detection ofillegalacts(AUSection317)

SAS54

• PrivateSecuritiesLitigation ReformActof1995

Section301of thePrivateSecuritiesLitigationReformAct

• Requirestheinclusionofcertainprocedures inaccordancewithgenerallyacceptedaccountingstandards(GAAS).• Auditproceduresprovidereasonableassuranceofdetectingillegalacts• Auditprocedureswillidentifyrelatedparty transactionsmaterialtofinancialstatements• Evaluateofthereissubstantialdoubtabout theabilityofthecanstayinbusiness.

Section10(a)oftheExchangeAct

• Auditor’sresponsibilityrelatedtofraudinafinancialstatement• Providesguidanceonwhatauditorsshoulddotomeettheseresponsibilities• Describes:

• FraudulentFinancialReporting• MisappropriationofAssets

SAS82


SAS 82Requ irements

§ Considerthepresenceoffraudriskfactors.- SASNo.82providesexamples(detailed below)ofriskfactorsanauditormayconsiderforfraudrelatedtoa)fraudulentfinancialreporting,andb)misappropriationofassetsmisstatements. Anauditorshouldbecome familiarwiththese riskfactorsandbealertfortheirpresenceattheclient’s.

§ Assesstheriskofmaterialmisstatementofthefinancial statementsduetofraud.SASNo.82requiresanassessment astotheriskofmaterialmisstatement duetofraud.Thisassessment isseparatefrombutmaybeperformedinconjunctionwithotherriskassessments (forexample,controlorinherentrisk)madeduringtheaudit.SASNo.82alsorequiresreevaluationofassessments ifotherconditionsareidentifiedduringfieldwork.

§ Developaresponse.Basedonassessments ofrisk,SASNo.82requiresdevelopment ofappropriateauditresponse.Insomecircumstances, anauditor’sresponsemaybethatexistingauditproceduresaresufficienttoobtainreasonableassurancethatthefinancialstatements arefreeofmaterialmisstatementduetofraud.Inothercircumstances, auditorsmaydecidetoextendplannedauditprocedures.

§ Documentcertainitemsinworkpapers.SASNo.82requiresauditorstodocumentevidence oftheperformanceoftheirassessment ofriskofmaterialmisstatement duetofraud.Documentation shouldincluderiskfactorsidentifiedasbeingpresentaswellastheauditor’sresponsetothese riskfactors.

§ Communicatetomanagement.Ifitisdetermined thatthereisevidencethatafraudmayexist,anauditorshouldapprisetheappropriatelevelofmanagement, evenifthemattermaybeconsideredinconsequential. SASNo.82alsorequiresanauditortocommunicate directlywiththeauditcommittee (orequivalent) ifthematter involvesfraudthatwouldmateriallymisstate thefinancialstatements orfraudcommitted byseniormanagement


FraudInvestigation


F raud Types

§ Billing-§ CashLarceny§ CashonHand§ CheckTampering§ Corruption§ FinancialStatementFraud§ Non-Cash§ Payroll§ RegisterDisbursements§ Skimming


F raud Analys is : Usefu l In formation§ Issues

§ Conflictsofinterest§ Unknownrelationships§ Abnormalpatternsofactivity§ Errorsinkeyprocesses§ Controlweaknesses§ Hindsight,insight,foresight

§ BusinessOperationsandExpenseAreas§ Accountspayable§ Claims

§ DamagedGoods§ Healthcare§ Insurance§ Loss

§ Expensereimbursement§ GeneralLedger§ TravelandEntertainment


Vendor Attr ibute Capture

§ Totalnumberofvendors§ Vendorswithout:

§ Addresses§ TAXID§ Aretheyreceivingpayment?§ Electronictransfers§ Paperchecks


Vendor Act iv ity Assessment

§ NumberofVendors§ FrequencyofUse§ NumberofActiveUsersComparedAgainstTotalVendors§ UnusedVendorscanbesourceofinternalabuse§ VendorIdentityAbuse


NameMin ing

§ LookingforFictitiousVendors§ FictitiousNames

§ Usetheirinitialsinthenameofavendor§ Anagrams§ Others

– Substitution– Insertion and Omission– Transposition– Number Substitution


Emp loyee Vendor Re lat ionsh ips

§ EmployeeandVendorNameareDifferent§ CommonAddresses§ Addressesthataredifferentbutareatthesamegeographic

location:§ 201CollegeAvenue§ 669WestChestnutStreet

§ PhoneNumber§ TAXID§ ZipCodes


Prox imity Analys is

§ MailboxServices§ Anonymous§ Thesemaildrophavetheappearanceofaphysicaladdress§ Proximitylocationofvendortoactualemployees

§ EmployeeAddresses§ VendorAddresses

§ ProximityAnalysis


Vendor T rend ingAnalys is

§ AccountsPayable§ ClaimsPayable§ FraudPaymentAcceleration

§ Smallinitialamountsoffraud§ Amountsandfrequencyincreases

§ TestPhase§ ConfidencePhase§ GreedPhase

§ TrendPaymentstoVendors§ ValleyandSpikePaymentPatterns

§ Longperiodsofinactivity betweenperiodsofveryhighactivity§ Unusuallyhighperiodsofactivity


Payment T rend Analys is

§ Calendar§ ByDayofWeek§ ByDayofMonth§ ByMonth§ Checkscreatedonweekends(SaturdaysandSundays)

§ Datecreated§ Dateposted

§ Benford’s Law§ Thefirstdigitshouldbea1…(30%ofthetime)


Ben ford ’s Law

McGinty, J. C. (2014). Accountants Increasingly Use Data Analysis to Catch Fraud - Auditors Wield Mathematical Weapons to Detect Cheating. The Wall Street Journal. (Web Site)


Check Sequence Analys is

§ G/L§ CashReceipts§ IdentifyGapsinCheckSequences


E xpense , Payro l l , and Vacation Contro ls

§ AnalysisofOvertimeHours§ Reasonableness§ Consistentwithrole

§ HolidayHours§ Reasonableness§ Consistentwithrole

§ PurchasingCards§ Spendingoverapprovallimits§ Splittransactionstoavoidlimit§ Collusionbetweensubordinateandsupervisortoavoidapproval

scrutiny§ VacationHours

§ Reasonableness§ Consistentwithrole§ Largeamountsofvacationoutsideofguidelines


O ther Analys is Areas

§ SystemAccessLogs§ MaintenanceFiles§ SocialMedia

§ ThePriceisRightFraud§ PhysicalInvestigations

§ Surveillance


Continuous Aud it ing

§ ProgrammaticAuditing§ SystemBased

Source: Cser, A. (2010).Market Overview: Fraud Management Solutions - Seven Tenets Of Effectively Combating Fraud Costs. Forrester Research.


Thank you .

mis 5208 week 2 fraud detection &...

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