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Fraud Detection and Prevention

through Data Analysis

Presented by:
Greg Taylor, CFE
Senior Vice President/CTO
Corporate Audit Partners
Agenda
 Introduction  Prevention and Detection
 Dry Run Test
 Defalcation Statistics  Consecutive Invoice Numbering
 Non-Sequential Invoice Numbers
 Case Studies
 Vendor Histogram
 Fictitious Invoices  PO Box Only Addresses
 Address Analysis
 Duplicate Payments  Bank Code Analysis
 Benford's Law
 Budget Manipulation  Number Duplication

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Introduction
Greg Taylor
 27 years of accounting and auditing
 Industries
 Banking
 Aerospace
 Advertising
 Owned Forensic Accounting Business
 17th year in the recovery auditing industry
 Published author – Please review Corporate Audit Partners website www.corporateaudits.com to
review some articles. “Why Employees Steal” and “Fraud Basics, The Perils of a Small Business”.
White paper – University of Arizona, Eller College of Management, “How to Lose $1.8 Billion in One
Week - Seven Ways to Protect Your Information from Security Loss”
http://iasec.eller.arizona.edu/white_papers/index.asp

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Occupational Fraud Statistics

 Association of Certified Fraud Examiners 2010 Report

 1,843 cases totaling approximately $1 billion in losses

 Est. typical U.S. organizations loses 5% of revenue to fraud

 Confidential Reporting mechanisms reduce fraud losses by 50% (tip line)

 Fraud losses are disproportionably large in small business

 80% of Frauds were committed in one of six departments; accounting,

operations, sales, executive management, customer service, purchasing

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
The What
 Defalcation last typically 16 months

 Fraudulent disbursements make up 64% of cases reviewed

 60% of Occupational Fraud loss at least $100,000

 Companies with less than 100 employees make up 30.8% the


cases

 Companies with 1,000 – 9,999 employees make up 25.9% of


cases

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
The Why

 The Four “D’s”


 Debt and Gambling

 Drug and Alcohol Abuse

 Divorce and Marital Problems

 Disgruntled Employee

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
The Who
 Typical Embezzler
 Management or supervisor position
 7 years plus with company
 Annual Income $100,000 - $149,000
 Male 66.7%
 Female 33.3%
 Age 19.3% are 36 – 40, 19.3%, 41-50
 Bachelors Degree 52%
 First Time Offender

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Detection Association of Certified Fraud Examiners
2004 Report to the Nation on Occupational Fraud and Abuse

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Cash Misappropriation
 Fraudulent Disbursements – Perpetrator causes company to
disburse funds by device or trick – Example: False invoices,
forged company check

 Skimming - Cash is stolen before been booked

 Cash Larceny – Cash is stolen after been booked

 2/3rd of all cash frauds were Fraudulent disbursements

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Case Study 1

 Fictitious Invoice
 Employee in Department works with Vendor

 Vendor creates invoice

 Employee approves invoice and submits to AP

 AP pays invoice for products or services not received

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Case Study 2

 Duplicate Payment
 AP Employee creates fictitious invoice using original invoice
documentation

 Check is cut to Vendor

 AP Employee calls vendor and informs them of the duplicate


payment

 AP Employee suggests that a refund check be cut per his or her


attention or made out to another name

 AP Employee receives refund check and pockets the cash

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Case Study 3

 Budget Manipulation
 Department Head contacts Vendor and suggests a pre-payment to
vendor

 Vendor sends invoice to Company

 Transaction number is noted as a quote number rather than an


invoice number

 Pre-payment check is cut to vendor

 Department expenses are misstated

 Department uses open vendor credit to adhere to budget

 Department receives bonuses on adherence to budget

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Dry Run Test

 This test identifies vendors or suppliers with large average invoice


dollar values that have a very low minimum invoice value

 The purpose of this test is to isolate invoices that are for a very low
dollar amount compared to the average. This can help to identify if
vendor/supplier is being used to test internal controls in the
accounting system

 Suggested review of even dollar invoices such as ($1.00, $5.00,


$10.00, $20.00….)

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Dry Run Test - Results
Client: xyz Company - Report XI
Dry Run Test

Item No. Vendor Num ber Vendor Nam e Average Invoice Am ount First Invoice Am ount Dry Run Test Percentage
1 723143234 OBAYASHI CORPORATION $563,712.13 $1,039.47 0.18%
2 306142033 DELL COMPUTER CORP $39,268.33 $93.00 0.24%
3 326114242 SODEXHO MARRIOTT CORPORATION $5,168.15 $17.76 0.34%
4 101091156 RF MACDONALD COMPANY $8,733.35 $52.24 0.60%
5 420101954 CELESTICA CORP. $22,369.95 $190.00 0.85%
6 327071713 SOCIETY FOR INFO. DISPLAY $7,597.50 $75.00 0.99%
7 101041067 PG&E $10,337.60 $105.80 1.02%
8 B04132909 ROPERS, MAJESKI, KOHN&BENTLEY $7,460.67 $90.00 1.21%
9 C01141001 HEWLETT PACKARD COMPANY $9,213.66 $112.58 1.22%
10 611145017 SHINKO AMERICA INCORPORATED $15,595.70 $233.73 1.50%
11 902094321 DURR ENVIRONMENTAL INCORPORATED $6,093.45 $105.34 1.73%
12 101091451 PRAXAIR INCORPORATED $17,107.90 $321.75 1.88%
13 330102517 EBARA TECHNOLOGIES INCORPORATED $18,607.67 $372.72 2.00%
14 331110258 COLLIERS HOUSTON & CO.PROPERT $5,170.14 $107.27 2.07%
15 A05094025 ORACLE CORPORATION $36,485.84 $880.00 2.41%

74 101041424 TOPPAN ELECTRONICS INC $31,016.11 $4,170.00 13.44%


75 125085409 TECHNICAL INSTRUMENT SAN FRANCISCO $6,229.18 $845.57 13.57%
76 911145522 SMI ELECTRONIC DEVICES AMERICA INC $25,950.20 $3,803.09 14.66%
77 0000000144 Dense Pac $9,772.92 $1,461.65 14.96%
78 101091169 RAY L HELLWIG PLUMBING & HEATING COMPANY $8,591.34 $1,310.00 15.25%
79 815103903 JEOL USA INCORPORATED $9,656.70 $1,491.70 15.45%
80 0000000299 ALLIED SECURITY $8,574.86 $1,388.80 16.20%

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Consecutive Invoice Numbering
 This test identifies vendor/suppliers with consecutive invoice
numbering

 The purpose of this test is two fold


1. Test can be used to identify misappropriations of funds by employee using
consecutive invoice numbers

2. Test can also be used as a risk management tool to identify vendors or


suppliers where your company is their only source of income. You can create
appropriate alternatives if the vendor or supplier goes out of business

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Consecutive Invoice Numbering - Results
Client: xyz Company - Report XII
Vendors / Consecutive Invoice Numbering

Invoice Invoice Vendor Postal Check Check


ID Num ber Date Invoice Am ount PO ID Num ber Vendor Nam e Address 1 Address 2 City State Code Num ber Date
31104 126012607 12/06/03 $11,615.49 6602 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311532 01/17/04
31105 126012608 12/07/03 $154.69 6602 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311532 01/17/04
31106 126012609 12/07/03 $24,012.94 6602 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311532 01/17/04
31107 126012610 12/07/03 $153.93 6602 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311532 01/17/04
31108 126012611 12/05/03 $45,563.01 6602 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311532 01/17/04
31109 126012612 12/05/03 $153.93 6602 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311532 01/17/04
31139 126015480 01/16/04 $5,233.59 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/04
31140 126015481 01/16/04 $769.65 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/04
31141 126015482 01/16/04 $3,540.37 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/04
31142 126015483 01/16/04 $1,693.22 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/04
31143 126015484 01/16/04 $3,386.44 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/04
31144 126015485 01/16/04 $593.82 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/04
31145 126015486 01/16/04 $928.17 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/04
31146 126015487 01/16/04 $618.78 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/04
31147 126015488 01/16/04 $8,662.90 420101954 CELESTIC SEASONING 2121 QUMEN DRIVE SAN MARCTX 72315 3311642 02/22/04
75541 507600 06/29/03 $2,861.43 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/03
75542 507601 06/29/03 $504.60 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/03
75543 507602 06/29/03 $963.09 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/03
75544 507603 06/29/03 $456.75 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/03
75545 507604 06/29/03 $124.41 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/03
75546 507605 06/29/03 $287.10 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/03
75547 507606 06/29/03 $12.92 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/03
75548 507607 06/29/03 $30.45 415082120 MORRIS, MORTON, HOWE 137 METEOR BLVD. SUITE 700 SAN JOSE CA 95110 3312624 08/08/03
82364 602104/0100 01/01/03 $3,384.17 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305826 04/03/03
82365 602104/0200 02/01/03 $3,178.06 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305826 04/03/03
82366 602104/0300 03/01/03 $2,670.82 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305826 04/03/03
82367 602104/0400 04/01/03 $3,404.77 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305826 04/03/03
82368 602104/0500 05/01/03 $3,184.09 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305836 07/03/03
82369 602104/0600 06/01/03 $3,053.95 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305836 07/03/03
82370 602104/0700 07/01/03 $2,996.78 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305836 07/03/03
82371 602104/0800 08/01/03 $3,498.83 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305842 09/03/03
82372 602104/0900 09/01/03 $3,350.58 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305842 09/03/03
82373 602104/1000 10/01/03 $1,986.51 L213709B 119163000 CORPORATE TRANSPORTATION INC FILE 66970 PO BOX 22100 SAN FRANCA 94144-4758 3305856 12/03/03

Prepared by: Corporate Audit Partners

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Non-Sequential Invoice Numbering

 This test identifies invoices out of character sequence.

 Most vendors or suppliers use the same sequence of alpha


numeric character

 By isolating characters out of sequence the company may be able


to identify defalcation, budget manipulation or wrong vendor
payment

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Non-Sequential Invoice Numbering -
Results
Report IX
Client XYZ
Non-Sequential Invoice Numbers

Vendor
Vendor Number Number Vendor Name Invoice Number Invoice Date Invoice Amount Invoice ID
52519 1223 A1CUST 1563 04/10/02 $200.00 539534
52520 1223 A1CUST 1564 04/10/02 $360.00 539536
58197 1223 A1CUST 1568 08/02/02 $1,000.00 555666
56446 1223 A1CUST 1570 06/26/02 $654.75 550872
59588 1223 A1CUST 1571 08/30/02 $600.00 559603
103605 1223 A1CUST 1572 08/06/03 $100.00 605382
63084 1223 A1CUST 1580 10/30/02 $162.50 568224
97639 1223 A1CUST 1585 04/09/03 $1,000.00 589298
97640 1223 A1CUST 1586 04/09/03 $80.00 589300
129070 4974 A1FAST 21-OCT-03 10/21/03 $250.00 616470

8151 1213 LBHCHEM 0021365-in 07/11/01 $219.94 503048


3396 1213 LBHCHEM 0029615-in 03/20/02 $405.66 536166
53248 1213 LBHCHEM 0030882-IN 04/24/02 $90.50 541550
54229 1213 LBHCHEM 0031641-in 05/17/02 $408.84 544417
102468 1213 LBHCHEM 0044698-IN 07/16/03 $554.19 602189
102868 1213 LBHCHEM 0044888-IN 07/23/03 $1,150.61 603148
104705 1213 LBHCHEM 0045863-IN 08/27/03 $348.89 608294
48039 1213 LBHCHEM 0039276 01/15/03 $539.59 578567
48040 1213 LBHCHEM 0039277 01/15/03 $540.00 578579

74486 3499 WILLIAM4 CA37239 03/10/03 $92.23 585410


74484 3499 WILLIAM4 CA37239 03/10/03 $92.23 585410
74483 3499 WILLIAM4 CA37239 03/10/03 $92.23 585410
74482 3499 WILLIAM4 CA37239 03/10/03 $92.23 585410
74485 3499 WILLIAM4 CA37239 03/10/03 $92.23 585410
32454 3499 WILLIAM 4 HP648C PRINTER 08/27/01 $127.59 509847
73398 3499 WILLIAM 4 JANUARY 31, 2003 02/03/03 $94.75 581652
78133 3499 WILLIAM 4 PC52202 05/23/02 $80.77 546506
122306 3499 WILLIAM 4 PLT 72 09/29/03 $511.43 613450
86061 3499 WILLIAM 4 TN 11/02 11/08/02 $453.58 570761
72854 3499 WILLIAM 4 WA/PA/M O 01/16/03 $495.76 579455

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Vendor Histogram

 This test identifies Vendor payment trends during a given time


period

 Most vendors or suppliers have similar transaction cycles or


transaction amounts

 Unusual or significant increases in either the frequency or value of


transactions can signify defalcation or collusion

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Vendor Histogram

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Vendors Scatter Graph

 This test identifies all Vendor payment trends during a given time
period and maps anomalies

 Horizontal analysis of year over year or period over period

 Most vendors or suppliers have similar transaction cycles or


transaction amounts

 Unusual or significant increases in either the frequency or value of


transactions can signify defalcation, collusion, or growing
inefficiencies.

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Vendor Scatter Graph

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
P.O. Box Only Addresses

 This test identifies vendors or supplies that only have PO Box


address

 The purpose of this test is to identify vendors that have no physical


address

 All vendors or suppliers should have a physical address listed in the


vendor master file

 The lack of a physical address may be an indication that a vendor


has been set up fictitiously in the vendor master file.

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
P.O. Box Only Address - Results
Vendor Master Report IV
Box Report - Vendors with PO Box Only Address

Vendor
Number Vendor Name Address1 City State Country Zip
4064 ABF FREIGHT SYSTEM, INC. PO BOX 142088 AUSTIN TX US 78714-2088
6849 ACCENT FLOORING, INC. PO BOX 19015 AUSTIN TX US 78760
9905 ADVANCE PLASTIC FABRICATORS PO BOX 5117 ROUND ROCK TX US 78683-5117
7907 AIRGROUP EXPRESS P.O. Box 3627 Bellevue WA US 98009-3627
5184 BAYSHORE PRESS PO BOX 67303 SCOTTS VALLEY CA US 95067-7303
1653 BETZDEARBORN, INC. PO BOX 846046 DALLAS TX US 75284-6046
9928 BGS INCENTIVE ACTIVITIES PO BOX 6044 KAMUELA HI US 96743
10598 CABLE ONE PO BOX 10 CALDWELL ID US 83606
8029 CALIFORNIA TECHNICAL INDUSTRIES PO BOX 66868 SCOTTS VALLEY CA US 95067-6868
11466 DANAHER POWER SOLUTIONS PO BOX 98392 CHICAGO IL US 60693
9821 DAVID RODERICK PO BOX 640295 SAN JOSE CA US 95164-0295
4776 DELTEX, INC. PO BOX 3258 LITTLETON CO US 80161-3258
2528 EESCO/UNITED ELECTRIC CO. PO BOX 91626 CHICAGO IL US 60693
9976 FINZER IMAGING SYSTEMS PO BOX 39082 DENVER CO US 80239-0082
6376 GOMEZ ENERGY SERVICES PO BOX 5082 GEORGETOWN TX US 78627
8455 HARTSTON,INC PO BOX 21941 LEXINGTON KY US 40522-1941
5504 L&L ASSOCIATES P.O. BOX 541 BREA CA US 92822
7065 MEETING SOLUTIONS, INC. PO BOX 4062 AUSTIN TX US 78765-4062
8348 MICRO COMPUTER CONTROL CORP. PO BOX 275 HOPEWELL NJ US 08525
7520 O.C. MCDONALD COMPANY INC. PO BOX 26560 SAN JOSE CA US 95159
9111 PADGETT THOMPSON PO BOX 4725 BUFFALO NY US 14240-4725
8721 PENINSULA VISA & PASSPORT SERVICES PO BOX 28 SANTA CLARA CA US 95052
6847 PIONEER PRESS PO BOX 64890 ST PAUL MN US 55164
2435 PNEUMATICO, INC. PO BOX 410310 MELBOURNE FL US 32941-0310
1891 PURVIS BEARING SERVICES, INC. PO BOX 540757 DALLAS TX US 75354-0757
9135 R&M ELECTRIC INC PO BOX 63479 COLORADO SPRINGS CO US 80962-3479
10365 SEZ AMERICA, INC. PO BOX 29830 PHOENIX AZ US 85038-9830

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Address Analysis

 This test compares vendor addresses to employee addresses

 This test can be used to identify employees who have set up


fictitious vendors in the vendor master file

 There may well be occasions where an employee is also set


up as a supplier or vendors but you should be aware of them

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Address Analysis - Results
Client: xyz Company - Report VI
Employee Address / Vendors Address Comparison

Address Em ployee Vendor


Match ID Num ber Vendor Nam e Address 1 Address 2 City State Postal Code
614153317 DOUBLETREE HOTEL SAN JOSE 1050 GATEWAY PLACE SAN JOSE CA 95110
0000000845 Plotter Pros 1086 The Alameda Suite 100 San Jose CA 95116
C11145617 RECOMMENDED RESOURCES 11 AMHERST ROAD AMHERST MA 1001
C11145617 RECOMMENDED RESOURCES (INACTIVE) 11 AMHERST ROAD AMHERST MA 1001
MATCH 009985 1336 Hill San Marcos TX 78022
MATCH 917150807 S M DESIGNES 1336 HILL St SAN MARCOS TX 78022
711131708 RT CONSTRUCTION 13455 NOEL RD SUITE 430 DALLAS TX 75140
615094134 RYDER TRANSPORTATION SERVICES 1481 O'TOOLE AVENUE SAN JOSE CA 95131
617143713 MONARCH INSTRUMENT 15 COLUMBIA DRIVE AMHERST NH 03031-1334
616094959 MASON WEST INCORPORATED 1840 GRETTO LANE ANAHEIM CA 91806
517160003 ADVANCED SYSTEM SOLUTIONS 3115 PERIVALE CT SAN JOSE CA 95148
831 Ev ent Connections 3657 El Grande Driv e San Jose CA 95131
110 MURAD SALES INCORPORATED 4600 GREENVILLE AVE SU DALLAS TX 75106
MATCH 731143218 G Consulting 5506 CHIMNEY RCK DR IRVING TX 76017
MATCH 009511 5506 Chimney Rock Driv e IRVING TX 76017
111 JUNIOR NATIONAL WHEELCHAIR CHAMPIONSHIPS 5730 CHAMBERLIN DRIVE SAN JOSE CA 95118
0000000510 HANSON PUBLICATIONS 64 CLIFTON AVENUE PO B AN SONIA CT 06401-0514
MATCH 008701 6610 Manzanita Dr. San Marcos TX 78027
MATCH A28135104 JS GRAPHICS 6610 MANZANITA DRIVE SAN MARCOS TX 78027
0000000701 INTERNET ASSOCIATION GROUP, INC. 6610 SOUTHPOINT DRIVE SUITE 600 JACKSONVILLE FL 31116
MATCH 007901 6701 row Way Laconia CA 05842
MATCH 624135327 DYGNETS 6701 ROW WAY LACONIA NH 05842
811 BLACKSTONE - NEY 9 N. MAIN ST JAMESTOWN NY 14701
817111810 CAE ULTRACSONICS 9 NORTH MAIN STREET JAMESTOWN NY 14701-0110
101090844 LAB SAFETY SUPPLY INCORPORATED DEPT #0000185191 PO BOX 5004 JANESVILLE WI 53547-5004
909111811 SPECIALIZED PRODUCTS COMPANY PO BOX 890006 DALLAS TX 75389-0006
101090036 LAIRD PLASTICS PO BOX 951111 DALLAS TX 75395
516165940 RW/STEARNS RIVER PARK TOWER 333 W. SAN CARLOS SSAN JOSE CA 95110-1711
515091707 IEEE VLSI TEST SYMPOSIUM VLSI Test Sy mposium 1001 Attn: Maddie Harw ood Amissv ille VA 10106

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Bank Code Analysis

 This test identifies instances where a vendor/supplier and an


employee have the same bank code number

 The test can also identify if multiple employees have the same
bank code number

 The purpose of this test is to find fictitious vendors or employees


set up in the payroll or vendor master files

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Benford's Law

P(kx) = f(k)P(x)
If fP(x)dx = 1, then fP(kx)dx = 1/k, and
normalization implies f(k) – 1/k. Differentiating
with respect to k and settings k = 1 gives
xPⁿ(x) = -P(x)

If you can understand this you are in the wrong workshop!

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Benford’s Law

$1,000,000 1
$23 2
$542 5
$100 1

12345 6789

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Benford’s Law - Why does it work!

 Functional Dependence
 Budget data depends on
 Corporation Size

 Particular Industry

 Quality of Management

 State of the Market

 Sales growth

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Benford's Law - History
 1881 Simon Newcomb American Astronomer “Notes on the
Frequency of the use of Digits in Natural Numbers”

 1938 Dr. Frank Benford Electrical Engineer General Electric “The


Law of Anomalous Numbers”

 1992 Dr. Mark Nigrini “Detection of Income Tax Evasion Through


and Analysis of Digital Frequencies”

 1999 Dr. Mark Nigrini “I’ve Got Your Number”

 2002 Dr. Mark Nigrini “Using Microsoft Access for Data Analysis
and Interrogation”
Mark J. Nigrini Ph.D. / Saint Michael's College / http://www.nigrini.com/
Dept of Business and Acctg - Campus box 104
One Winooski Park / Colchester Vermont 05439
Tel: (802) 654-2894 (Saint Michael's office)

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Benford's Law - First Digit Analysis
0.300000

0.250000

0.200000

0.150000

0.100000

0.050000

0.000000
1 2 3 4 5 6 7 8 9

MFG 1 0.301980 0.173300 0.122330 0.091430 0.082010 0.066050 0.057500 0.054620 0.050770
MFG 2 0.310863 0.173561 0.131462 0.086964 0.080502 0.064560 0.055869 0.049351 0.046868
MFG 3 0.303399 0.171330 0.125069 0.098053 0.085215 0.065212 0.055819 0.050058 0.045845
Benford 0.301030 0.176091 0.124939 0.096910 0.079181 0.066947 0.057992 0.051153 0.045758
min 0.300000 0.166000 0.113000 0.087000 0.069000 0.057000 0.048000 0.041000 0.036000
max 0.320000 0.186000 0.133000 0.107000 0.089000 0.077000 0.068000 0.061000 0.056000

MFG 1 MFG 2 MFG 3 Benford min max

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Benford's Law - Second Digit Analysis
0.160000

0.140000

0.120000

0.100000

0.080000

0.060000

0.040000

0.020000

0.000000
0 1 2 3 4 5 6 7 8 9

MFG 1 0.147670 0.110520 0.108630 0.097790 0.094860 0.101870 0.087940 0.086410 0.081550 0.082760
MFG 2 0.148335 0.100621 0.107054 0.094498 0.093538 0.108916 0.089983 0.089080 0.084424 0.083550
MFG 3 0.142515 0.101389 0.107227 0.096407 0.095376 0.111879 0.091042 0.087048 0.083536 0.083580
Benford 0.119680 0.113890 0.108820 0.104330 0.100310 0.096680 0.093370 0.090350 0.087570 0.085000
Min 0.109680 0.103890 0.098820 0.094330 0.090310 0.086680 0.083370 0.080350 0.077570 0.075000
max 0.129680 0.123890 0.118820 0.114330 0.110310 0.106680 0.103370 0.100350 0.097570 0.095000

MFG 1 MFG 2 MFG 3 Benford Min max

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San Juan Capistrano, CA 92675
Benford’s Law - Statistics
Benford
Benford's Benford's "CAP First Two Benford's First Two Benford's First Two Benford's
1st Digit Law 2nd Digit Law Modified" Digits Law Digits Law Digits Law
1 30.10% 0 12.0% 14.6% 10 4.14% 40 1.07% 70 0.63%
2 17.61% 1 11.4% 10.4% 11 3.78% 41 1.05% 71 0.62%
3 12.49% 2 10.9% 10.8% 12 3.48% 42 1.02% 72 0.62%
4 9.69% 3 10.4% 9.6% 13 3.22% 43 1.00% 73 0.61%
5 7.92% 4 10.0% 9.5% 14 3.00% 44 0.98% 74 0.60%
6 6.69% 5 9.7% 10.8% 15 2.80% 45 0.95% 75 0.59%
7 5.80% 6 9.3% 9.0% 16 2.63% 46 0.93% 76 0.58%
8 5.12% 7 9.0% 8.8% 17 2.48% 47 0.91% 77 0.58%
9 4.58% 8 8.8% 8.3% 18 2.35% 48 0.90% 78 0.57%
9 8.5% 8.3% 19 2.23% 49 0.88% 79 0.56%
20 2.12% 50 0.88% 80 0.55%
21 2.02% 51 0.88% 81 0.55%
22 1.93% 52 0.86% 82 0.54%
23 1.85% 53 0.84% 83 0.53%
24 1.77% 54 0.83% 84 0.53%
25 1.70% 55 0.81% 85 0.52%
26 1.64% 56 0.80% 86 0.51%
27 1.58% 57 0.78% 87 0.51%
28 1.52% 58 0.77% 88 0.50%
29 1.47% 59 0.76% 89 0.50%
30 1.42% 60 0.74% 90 0.49%
31 1.38% 61 0.73% 91 0.49%
32 1.34% 62 0.72% 92 0.49%
33 1.30% 63 0.71% 93 0.49%
34 1.26% 64 0.69% 94 0.48%
35 1.22% 65 0.68% 95 0.47%
36 1.19% 66 0.67% 96 0.47%
37 1.16% 67 0.66% 97 0.46%
38 1.13% 68 0.65% 98 0.46%
39 1.10% 69 0.64% 99 0.45%

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Benford’s Law - Using Access Database

Invoice Transaction Table

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Benford’s Law - Using Access Database

Raw Invoice Transaction Data

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


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Benford’s Law - Using Access Database

Query Object

This is where the data analysis actually occurs

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


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Benford’s Law - Using Access Database

Run Query to see results

Query built to strip off left most digit


from the invoice amount

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Benford’s Law - Using Access Database

Invoice Amount

Stripped Left Most Digit

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


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Benford’s Law - Using Access Database

Summary Query to Summarize


Benford’s Law First Digit results

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Benford’s Law - Using Access Database

Group By Button

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Benford’s Law - Using Access Database

Benford’s Law First Digit Results

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


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Benford’s Law - Using Access Database

Send analysis to Microsoft Excel


Worksheet

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Benford’s Law - Excel Download

Results downloaded to Excel

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


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Benford’s Law - Excel Analysis

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Benford’s Law - Excel Analysis

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Benford’s Law - Two-Digit Analysis

Benfords Law Two-Digit


Expression

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Benford’s Law - Two-Digit Analysis

Invoice Amount

Stripped Left Most Digit

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Benford’s Law - Two-Digit Analysis

Benford’s Law
First Two Digit
Results

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


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Benford’s Law - Two-Digit Analysis

Findings
Frequency

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


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Benford’s Law - Two-Digit Analysis

Anomalies to review

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


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Number Duplication Subset Test

 The Number Duplication test will tell what specific numbers were
causing spikes (positive differences) on the first-two digit test

 For each of the number categories we want a table of number


frequencies showing:
1. The rank (1,2,3,4,5…..)
2. The frequency (or count), and
3. The number (usually dollars) that was duplicated
 The table is usually sorted by frequency descending

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Number Duplication Subset
Access Query

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Number Duplication - Test Results

The invoice amount of $315.00


was entered 690 times

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Number Duplication Test - Design View

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


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Number Duplication - Test by Vendor

Number Duplication
Isolated by Vendor

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Conclusion
 Data analysis can help to isolate anomalies for further review

 The best prevention is constant testing

 Please feel free to contact us at any time with questions or comments

 Thank you for your participation

Greg Taylor / Corporate Audit Partners


Phone: 949.488.7648 Ext 829
Email: gtaylor@corporateaudits.com
Website: www.corporateaudits.com

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675
Reference Material
Mark J. Nigrini Ph.D. / Saint Michael's College / http://www.nigrini.com/
Dept of Business and Acctg - Campus box 104
One Winooski Park / Colchester Vermont 05439
Tel: (802) 654-2894 (Saint Michael's office)

Association of Certified Fraud Examiners Inc. / www.CFEnet.com


The Gregor Building
716 West Avenue / Austin, TX 78701-2727
Tel: (800) 245-3321

Corporate Audit Partners


VRM Partner™
Advanced Software Solutions
Phone: 949.488.7648 Ext 829
Email: gtaylor@corporateaudits.com
Web: www.corporateaudits.com

Corporate Audit Partners - 30900 Rancho Viejo Road - Suite 245


San Juan Capistrano, CA 92675