Fraud Examination, 3E Chapter 6: Data-Driven Fraud Detection COPYRIGHT © 2009 South-Western, a part of Cengage Learning

Learning Objectives Describe the importance of data-driven fraud detection, including the difference between accounting anomalies and fraud. Explain the steps in the data analysis process. Be familiar with common data analysis packages. Understand the principles of data access, including open database connectivity (ODBC), text import, and data warehousing. 2

Learning Objectives Perform basic data analysis procedures for fraud detection. Read and analyze a Matasos matrix. Understand how fraud is detected by analyzing financial statements. 3

Data-Driven Fraud Detection Fraud vs. Anomalies Anomalies… – are not intentional – will be found throughout a data set Fraud… – is intentional – is found in very few data sets – is like “finding a needle in a haystack” 4

Proactive Method of Fraud Detection The Six Steps of the Proactive Method: 1.Understand the business 2.Identify Possible Frauds That Could Exist 3.Catalog Possible Fraud Symptoms 4.Use Technology to Gather Data About Symptoms 5.Analyze Results 6.Investigate Symptoms 5

Data Analysis Software Audit Command Language (ACL) – Powerful program for data analysis – Most widely used by auditors worldwide CaseWare’s IDEA – Powerful program for data analysis with more Windows-like user interface – ACL’s primary competitor Picalo – Similar to IDEA and ACL but incorporates “Detectlets”—small plug-ins to detect fraud indicators 6

Data Access Gathering the right data in the right format during the right time period. Methods include: Open Database Connectivity (ODBC) Text Import Hosting a Data Warehouse 7

Data Analysis Analysis techniques that are most commonly used by fraud investigators: Data Preparation Digital Analysis Outlier Investigation Stratification and Summarization Time Trend Analysis Fuzzy Matching Benford’s Law 8

Data Analysis – Matasos Matrix One way to view the results of multiple indicators is to use a chart called a Matasos matrix: 9 Contract Winning Vendor Number of Red Flags Lost Bids Brand Names Last Bidder Winner Sequential Bid Security Number Direct Corp.10%70%0% Satyoo20%68%0%100% Danicorp10%72%0% Under Inc.30%70%100%

Financial Statement Analysis Approaches to Financial Statement Analysis: comparing account balances from one period to the next calculating key ratios and comparing them from period to period performing horizontal analysis performing vertical analysis 10