Fraud Risk Management...Examine how continuous monitoring and automated tools can help manage fraud...
Transcript of Fraud Risk Management...Examine how continuous monitoring and automated tools can help manage fraud...
© 2020 Association of Certified Fraud Examiners, Inc.
Fraud Risk Management
Using Automated Continuous
Monitoring Tools
© 2020 Association of Certified Fraud Examiners, Inc.
Discussion Questions
1. Does your organization use continuous and/or
automated monitoring to address fraud risks? If
so, how successful has it been in identifying
potential frauds?
© 2020 Association of Certified Fraud Examiners, Inc.
Discussion Questions
2. Design a continuous monitoring test that might
uncover the following fraud:
a. An hourly employee is recording five hours of
overtime each week and is actually working no
overtime at all. The supervisor has approved the time
cards each pay period, and employees are required
to badge in and out of the building for security
purposes.
© 2020 Association of Certified Fraud Examiners, Inc.
Discussion Questions
2. Design a continuous monitoring test that might
uncover the following fraud:
b. A vice president of the organization has created a
shell company, set up the company as a vendor in
the organization’s accounting system, and begun
submitting invoices to the accounts payable
department for “consulting services” that were never
performed.
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Discussion Questions
2. Design a continuous monitoring test that might
uncover the following fraud:
c. A marketing employee who travels regularly for
business and pleasure submitted an expense
reimbursement for the same flight twice. The
supervisor forgot that they had already approved it
the first time and approved it a second time.
© 2020 Association of Certified Fraud Examiners, Inc.
Discussion Questions
2. Design a continuous monitoring test that might
uncover the following fraud:
d. A fraudulent vendor submits invoices in sequential
number order, as this “vendor” has only one
customer—your organization.
© 2020 Association of Certified Fraud Examiners, Inc.
Discussion Questions
2. Design a continuous monitoring test that might
uncover the following fraud:
e. A payroll department employee has set up a ghost
employee in the payroll system and used their own
bank account information for the direct deposit. The
payroll and human resources departments are
separate in this organization.
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Discussion Questions
3. What issues might you encounter in running the
tests designed to catch the previous schemes?
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Learning Objectives
▪ Examine how continuous monitoring and
automated tools can help manage fraud risk.
▪ Identify some benefits and potential issues of
using automated tools for fraud risk
management.
▪ Compare some of the tools available for
automated monitoring of fraud risks.
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Learning Objectives
▪ Identify tests that can be run by automated tools
to uncover potential frauds.
▪ Understand how monitoring financial ratios and
other metrics can help manage the risk of fraud.
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What Is Continuous Monitoring?
▪ The process of
regularly performing
tests to detect
fraudulent acts
▪ A best practice in
managing the risk of
fraud
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What Does Continuous
Monitoring Mean?
▪ Proactive search for abnormal behaviors and
transactions
▪ Reduction in fraud duration and losses
▪ Not a guarantee that all frauds will be detected
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Applications of Continuous Monitoring
▪ Focus on anomalies in each stage of a scheme:
• Perpetration
• Concealment
• Override or improper application of preventive or
detective controls
• Effect of the scheme
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Implementing Continuous Monitoring
▪ Designate a department or person as
responsible for developing, executing, and
updating the continuous monitoring program.
▪ Base the program on the risk assessment.
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Benefits of Using Automated Tools
▪ Saves personnel resources
▪ More comprehensive coverage of data
▪ More precise than the human eye
▪ Easier to maintain confidentiality
▪ Quicker to analyze large volumes of data
▪ Easier to identify trends in data
▪ Compares data across applications and
systems
© 2020 Association of Certified Fraud Examiners, Inc.
Benefits of Using Automated Tools
▪ Implements a comprehensive set of potential
fraud indicators
▪ Compares transactions within a given area and
tests them against established expectations
▪ Performs analysis on a continuous basis
▪ Maintains comprehensive logs of all activities
performed
▪ Links testing results to report templates
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Potential Issues with Using
Automated Tools
▪ False positives
▪ Not all frauds uncovered
▪ Might be cost prohibitive
▪ Built-in edits and controls in current software
▪ Additional training and staff requirements
▪ Preference for reviews of hard copies
▪ Employees feeling they are constantly “watched”
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Choosing an Automated Tool
▪ Budget
▪ Data structure and volume
▪ Training alternatives
▪ Access options such as remote or server
▪ User configuration and number of users
▪ Functionality
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Feature ExcelActiveData for
ExcelGalvanize IDEA
Table Manipulation
Append/merge X X X X
Export X X X X
Extract X X X X
Join/relate X X X
Functions
Aging X X X
Calculated field X X X X
Cross tabulation X X X
Benford’s Law analysis X X X
Duplicates X X X
Gaps X X X
Sample X X
Sort X X X X
Summarize X X X X
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Types of Tests Run by Automated Tools
▪ Search for duplicates (A/R, payroll).
▪ Search for sequential invoice numbers.
▪ Compare paid employees to other employee
listings.
▪ Test time card reasonableness.
▪ Test payroll reasonableness.
▪ Examine voided checks.
© 2020 Association of Certified Fraud Examiners, Inc.
Types of Tests Run by Automated Tools
▪ Test purchase order limits.
▪ Identify management overrides.
▪ Analyze vendor information changes.
▪ Examine receivables aging.
▪ Compare vendor summary totals.
▪ Calculate descriptive statistics.
© 2020 Association of Certified Fraud Examiners, Inc.
Types of Tests Run by Automated Tools
▪ Benford’s Law analysis
▪ Employee-to-vendor address match
▪ Searching for unrecorded liabilities
▪ Testing journal entry approval process
▪ Journal entry gap tests
▪ Identifying nonstandard journal entries
▪ Summarizing activity by user account
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Textual Analytics
▪ Involves scanning emails
and text documents for
presence of keywords
that might indicate fraud
▪ Requires close guidance
from legal counsel
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Metrics and Ratio Analysis to Identify
Fraud, Waste, and Abuse
▪ Inventory turnover, both for individual parts and
in the aggregate
▪ Concentrations of vendors and customers
▪ Profit by customers and product line
▪ Significant inconsistencies between reporting
earnings and cash flows from operations
© 2020 Association of Certified Fraud Examiners, Inc.
Metrics and Ratio Analysis to Identify
Fraud, Waste, and Abuse
▪ Unusual relationships between recorded sales
volume and production statistics
▪ Trends in sales, cost of sales, and gross profit
▪ Rapid growth, especially compared to that of
other companies in the same industry
© 2020 Association of Certified Fraud Examiners, Inc.
Example of Using Metrics and Ratio
Analysis to Identify Fraud
Koss Corp.
Statements of Income (excerpts)
2016 2017 2018 2019
Revenues 50.9 46.2 46.9 38.2
Cost of Sales 31.1 28.3 29.2 24.9
Gross Profit 19.8 17.9 17.7 13.3
Gross Profit % 38.9% 38.7% 37.7% 34.8%
Currency in Millions of U.S. Dollars
Fiscal Year-End: June 30