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FRN combines the high quality, authoritative anti-fraud and audit content from the leading providers, AuditNet ® LLC and White-Collar Crime 101 LLC/FraudAware. The two entities designed FRN as the “go-to”, easy-to-use source of “how-to” fraud prevention, detection, audit and investigation templates, guidelines, policies, training programs (recorded no CPE and live with CPE) and articles from leading subject matter experts. FRN is a continuously expanding and improving resource, offering auditors, fraud examiners, controllers, investigators and accountants a content-rich source of cutting-edge anti-fraud tools and techniques they will want to refer to again and again. White-Collar Crime Fighter Newsletter Subscribe Now at No Cost! FraudResourceNet has made the premier Anti-Fraud newsletter, White-Collar Crime Fighter freely available to all. All this is required is to complete the registration form with your work email address! The widely read newsletter, White-Collar Crime Fighter brings you expert strategies and actionable advice from the most prominent experts in the fraud-fighting business. Every two months you'll learn about the latest frauds, scams and schemes... and the newest and most effective fraud-fighting tools, techniques and technologies to put to work immediately to protect your organization. When it comes to fraud, knowledge of the countless schemes, how they work and red flags to look for will help keep you, your organization and your clients safe. At FraudResourceNet we understand this and take great pride in providing our FREE White Collar Crime Fighter newsletter -- filled with exclusive articles and tips to provide the knowledge you need. Make sure you stay informed. Sign up for White Collar Crime Fighter newsletter and we’ll keep you up-to-date on special promos, training opportunities, and other news and offers from FraudResourceNet! Signing up is easy and FREE. If you have not already subscribed to our newsletter, please sign up to get started! Sign up for the White Collar Crime Fighter Newsletter (a $99 value ... now completely FREE)
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3/5/2014
1
Copyright © FraudResourceNet LLC
ThePowerofBenford'sLawinFindingFraud
Special Guest Presenter:Donald E. Sparks, CIA, CISA, CRMA
March 5, 2014
Copyright © FraudResourceNet LLC
About Peter Goldmann, MSc., CFE
• President and Founder of White Collar Crime 101
• Publisher of White-Collar Crime Fighter• Developer of FraudAware® Anti-Fraud Training • Monthly Columnist, The Fraud Examiner, ACFE
Newsletter
• Member of Editorial Advisory Board, ACFE
• Author of “Fraud in the Markets”
• Explains how fraud fueled the financial crisis.
3/5/2014
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About Jim Kaplan, MSc, CIA, CFE
• President and Founder of AuditNet®, the global resource for auditors (now available on Apple and Android devices)
• Auditor, Web Site Guru,
• Internet for Auditors Pioneer
• Recipient of the IIA’s 2007 Bradford Cadmus Memorial Award.
• Author of “The Auditor’s Guide to Internet Resources” 2nd Edition
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About Don Sparks, CIA, CISA, CRMA, CRMA, ARM
• Vice President Industry Relations -Audimation Services, Inc.
• Property/casualty insurance internal audit experience (12 yrs. as CAE)
• Risk Services firms
• The IIA – eLearning: GAIN, Flash Surveys, & Role of Audit in SOX 2002 monthly 2 hour web tv broadcasts
• NAIC IT Working Papers Committee
• Co-Author of GTAG 13 & GTAG 16
• June 2011, Creator & Programmer Auditchannel.tv
Don Sparks
3/5/2014
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Copyright © FraudResourceNet LLC
Webinar Housekeeping
• This webinar and its material are the property of FraudResourceNet LLC. Unauthorized usage or recording of this webinar or any of its material is strictly forbidden. We are recording the webinar and you will be provided with a link access to that recording as detailed below. Downloading or otherwise duplicating the webinar recording is expressly prohibited.
• Webinar recording link will be sent via email within 5-7 business days.
• NASBA rules require us to ask polling questions during the Webinar and CPE certificates will be sent via email to those who answer ALL polling questions
• The CPE certificates and link to the recording will be sent to the email address you registered with in GTW. We are not responsible for delivery problems due to spam filters, attachment restrictions or other controls in place for your email client.
• Submit questions via the chat box on your screen and we will answer them either during or at the conclusion.
• After the Webinar is over you will have an opportunity to provide feedback. Please complete the feedback questionnaire to help us continuously improve our Webinars
• If GTW stops working you may need to close and restart. You can always dial in and listen and follow along with the handout.
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Disclaimers
• The views expressed by the presenters do not necessarily represent the views, positions, or opinions of FraudResourceNet LLC (FRN) or the presenters’ respective organizations. These materials, and the oral presentation accompanying them, are for educational purposes only and do not constitute accounting or legal advice or create an accountant‐client relationship.
• While FRN makes every effort to ensure information is accurate and complete, FRN makes no representations, guarantees, or warranties as to the accuracy or completeness of the information provided via this presentation. FRN specifically disclaims all liability for any claims or damages that may result from the information contained in this presentation, including any websites maintained by third parties and linked to the FRN website
• Any mention of commercial products is for information only; it does not imply recommendation or endorsement by FraudResourceNet LLC
3/5/2014
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Today’s Agenda
Auditing for Fraud: Standards & Essentials
Learning the logic/help explain it to others
A user‐friendly introduction
Help detect the red flags of fraud
Best data to use
Step‐by‐step demonstration of fraud audits
Common software programs to facilitating use
Demonstration on 492,000 P‐Card File
Your Questions - Conclusion
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Fraud Applications
Forensic Auditing
Tax Auditing
Audit of Annual Financial Statements
Internal Auditing
Corporate Finance/Company Evaluation
Controllers
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Using Statistics To Seek Out Criminals
Feb. 26, 2013 – Discovery of banks’ efforts to manipulate the London Interbank Offered Rate (LIBOR) owes a lot to statistical techniques that provide first indications of wrongdoing.
If regulators (and auditors) want to uncover more misdeeds in the markets, they’ll have to use statistical screening tools more actively than they do today.
Extending the analysis over a 30 year period revealed Libor submissions followed Benford’s closely for about 20 years, but began to diverge sharply in the mid‐2000’s.
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Bernie Madoff Fraud
When it comes to Madoff, if it is too good to be true chances are it is not true. This issue is definitely a candidate for the fraud of the century!
3/5/2014
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Do Patterns in Data Mean Anything?
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Inventors and Innovators
Simon Newcomb – 1881
Frank Benford – 1938
Roger Pinkham – 1961
Mark Nigrini – 1992
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Benford’s Law Defined
On the right, you can see the number 1 occurs as the leading digit 30.1% of the time, while larger numbers occur in the first digit less frequently.
For example, the number 3879
3 ‐ first digit
8 ‐ second digit
7 ‐ third digit
9 – fourth digit
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Expected Frequencies Based on Benford’s Law
Digit 1st
Place 2nd
Place 3rd
Place 4th
Place
0 0.11968 0.10178 0.10018
1 0.30103 0.11389 0.10138 0.10014
2 0.17609 0.19882 0.10097 0.1001
3 0.12494 0.10433 0.10057 0.10006
4 0.09691 0.10031 0.10018 0.10002
5 0.07918 0.09668 0.09979 0.09998
6 0.06695 0.09337 0.0994 0.09994
7 0.05799 0.0935 0.09902 0.0999
8 0.05115 0.08757 0.09864 0.09986
9 0.04576 0.085 0.09827 0.09982
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Polling Question 1
Benford’s Law is sometimes also called:
A. First‐Digit LawB. First‐two Digits LawC. Third‐Digit LawD. Nigrini’s Law
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Key Facts
The number 1 predominates most progressions.
Probabilities are scale invariant – works with numbers denominated as dollars, yen, euros, pesos, rubles, etc.
Not all data sets are suitable for analysis.
Not good for sampling – results in large selection sizes.
Good low cost entry into using continuous auditing/monitoring.
3/5/2014
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Can You Use it To Win the Lottery?
No. Outcome of the lottery is truly random. This means every lottery number has an equal chance of occurring.
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Is Benford’s Law in Your Anti‐Fraud Program?
3/5/2014
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See Red Flags ‐ Less Costly, Better and Faster
Technology is getting better all the time The need to find fraud faster to improve recovery Risk based audit planning Early warning sign past data patterns have changed Fraud Deterrence – fraudsters may not understand
the theory but know audit is always looking Identify Duplicates, Whole Numbers, Recurring
Expenses, other data pattern Anomalies Great analytic when coupled with high dollar and
stratified random sample techniques
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Polling Question 2
Benford’s Law is a good tool for finding fraud when just a few fraudulent transactions are entered into the system.
A. TrueB. False
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CFE found a 6 year $860,000 AP fraud. I often get a question could Benford’s have found this sooner?
CFE asked three questions: How many employees work in AP
Longest tenure employee
Can you pull 6 years of AP from AS400
Imported AP into IDEA
Ran Summarization
Bank re‐imaged suspicious duplicate checks selected by the CFO
Demo Real Fraud
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Types of Data That Conform
Accounts Payable (number sold * price)
Estimations in General Ledger
Test of approval violations under $2,500
Accounts Receivable (number bought*price)
Inventories at many locations
Purchase orders
Disbursements Computer System data file conversions
Loan data
Sales Processing inefficienciesdue to high quantity
Customer balances
T&E Expenses New Combinations of selling prices
Stock prices
Most sets of Accounting Numbers with
Customer refunds Journal entries
Full year of transactions Credit card transactions
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Non‐Conforming Data Types
Situation Examples
Data set comprised of assigned numbers
Checks, invoices, zip codes, telephone, insurance policy YYMM####
Numbers influenced by human thought
Prices set at psychological thresholds ($1.99, ATM withdrawals)
Accounts with a large number of firm-specific numbers
An account specifically set up to record $100 refunds
Accounts with a built in minimum or maximum
Assets must meet a threshold before recorded
Airline passenger counts per plane Data sets with 500 or fewer transactions
Where no transaction is recorded Theft, kickback, skimming, contract rigging
Situation Examples
Data set comprised of assigned numbers
Checks, invoices, zip codes, telephone, insurance policy YYMM####
Numbers influenced by human thought
Prices set at psychological thresholds ($1.99, ATM withdrawals)
Accounts with a large number of firm‐specific numbers
An account specifically set up to record $100 refunds
Accounts with a built in minimum or maximum
Assets must meet a threshold before recorded
Airline passenger counts per plane Data sets with 500 or fewer transactions
Where no transaction is recorded Theft, kickback, skimming, contract rigging
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First and Second Digit Analysis *
First Two Digits Analysis*
First Three Digits Analysis**
Last Two Digits Analysis**
Summation Test**
Advanced Settings – Fuzzy Logic Setting #
Rounded By Analysis #
Duplication Analysis #
* =Primary **=Advanced #=Associated
Uses in Fraud Investigations
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Polling Question 3
Types of financial data that conform to use in Benford’s Law testing (choose the best answer(s)
A. Accounts Payable (number sold * price)B. Accounts Receivable (number bought * price)C. DisbursementsD. SalesE. All of the aboveF. All of the above
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Check for Benford’s Conformity
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First and Second Digit Analysis
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First Two Digits Analysis
Examines the frequency of the numerical combinations 10 through 99 on the first two digits of a series of numbers.
In particular the output serves for the analysis of avoided threshold values. Thus, these tests help to clearly visualize when order or permission limits have been systematically avoided.
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First Three Digits Analysis
This test examines the frequency of the numerical combinations 100 through 999 in the first two digits of a series of numbers.
The output serves for analysis after conspicuous rounding off operations. Requires a large amount of deviations with a population greater than 10,000.
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Last Two Digits Test:
The Last Two Digits test analyzes the frequency of the last two digits and is useful in auditing election results, inventory counts—any situation in which padding or number invention is suspected.
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This test is used to analyze the relative increasing frequency of rounded numbers.
The determination comprises the frequencies of the numbers that are divisible by 10, 25, 100 and 1,000 (and any user‐defined values of whole numbers) without remainders.
Rounded By Analysis
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The analysis of multiple duplicates includes all number values in the entire database that occur more than once. This test helps the user to recognize all existing duplicates in the data supply whereas the result table presents the duplicates sorted according to the descending frequency. The aim of the test is to identify certain numbers that occur more than once (for example, possible duplicate payments). Difference from the other tests: Does not analyze any numerical combinations, but the pure value of a number.
Duplicates Analysis
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Summation Test
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Second Order Test
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Advanced Settings
With most Benford’s Law tests in IDEA Version Nine, you have the option of extracting “suspicious” data whose digit frequencies do not follow the digit frequencies of Benford’s Law.
With Advanced Settings, you can also refine this output to limit the size of the output database.
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Polling Question 4
Area(s) where Benford’s Law is not a good tool (choose all that apply):
A. All the numbers in a series are at or below $9.99 or frauds involving situations where nothing is recorded.
B. All of the numbers are positive.C. All of the numbers are negative.D. Very large data sets over 1 billion records.
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Benford’s Law Software
Integrated Tools Add‐In Component
CaseWare IDEA Excel
Arbutus Access
Active Data SAS
ACL
ESKORT Computer Audit (SESAM)
Tableau
TopCAATs
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Creating a Continuous Auditing Application
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Demo P‐Card File ‐ Steps in Presentation
Stratify the Population
Analyze the Population Using Benford
Organize Population into groups by the number of leading digits.
Analyze Groups Using Benford
Store Benford Analysis into a Table and then extract high frequency digit combinations
Make the analysis “repeatable and continuous”.
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Polling Question 5
Mark Nigrini:A. Invented Benford’s LawB. Is a close relative of BenfordC. Is the only one to find fraud using Benford’s LawD. Believes auditors should use it to detect fraud
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Improve Data Analysis Skills
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Conclusion
Digital analysis tools like Benford’s Law enable auditors and other data analysts to focus on possible anomalies in large data sets. They do not prove that error or fraud exist, but identify items that deserve further study on statistical grounds. Digital analysis complements existing analytical tools and techniques, and should not be used in isolation from them.
Not necessarily fraud – many False positives
Certain types of fraud will not be detected
Useful tool, setting future auditing plans
Low Cost Entry into Digital continuous analysis
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Questions?
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Thank You!
• Peter Goldmann
• FraudResourceNet LLC
• 800-440-2261
• www.fraudresourcenet.com
• Jim Kaplan
• FraudResourceNet LLC
• 800-385-1625
• www.fraudresourcenet.com
• Don Sparks
• 832‐327‐1877