Data Analytics the Secret Tool of Savvy Forensic Accountants
It’s a busy time of year for accountants: tax season is here, and many organizations are now wrapping up their fiscal years. For accountants, this means large volumes of data that must be reviewed, processed and analyzed. More and more often we’re seeing auditors and accountants alike turn to data analytics to reveal outliers and trends in their data—all of which helps them detect fraud.
A great example of accountants leveraging data analytics to uncover fraud took place in 2014 when CaseWare Analytics client KPMG audited a call centre. In this organization, hundreds of call centre operators could issue—without need for their manager’s approval—refunds of up to USD $50. Within the span of several years, each operator issued more than 10,000 refunds. This presented an ideal opportunity for theft, so KPMG used data analytics—Benford’s Law, specifically—to verify the validity of the refunds. Benford’s Law expects that 30.1% of numbers in a list of financial transactions will begin with ‘1’, 18% with ‘2’, and so on, with each successive digit predicted to represent a progressively smaller proportion. When digits fall outside the expected pattern, it may indicate fraud.
Using the Benford’s Law functionality in their data analysis software, KPMG found that there was a large spike in fours—the refunds did not follow Benford’s Law. As the accountants soon discovered, several operators had been issuing refunds just below the $50 threshold to friends, families and even themselves. Hundreds of thousands of dollars in fraudulent refunds had been processed and may have gone undetected had a Benford’s analysis not been conducted on the refund data.
Forensic accountants in other organizations have also been hopping on the data analytics bandwagon in the hopes of uncovering fraud. Included amongst these organizations is the U.S. Securities and Exchange Commission (SEC), which has been assessing how it can use data analytics to support its efforts to police for fraud.
CaseWare IDEA offers the most advanced Benford’s Law analysis available in data analysis software today. Developed in consultation with renowned Benford’s Law expert Dr. Mark Nigrini, IDEA’s data analytics offer the most fraud-fighting tests, including the Last Two Digits test (helpful when padding or number invention is suspected), the Second Order test (useful for revealing data integrity issues), and the Summation test (which allows you to identify amounts that don’t conform to Benford’s Law).
When it comes to helping forensic accountants detect fraud, Benford’s Law isn’t the only data analytics test that can prove useful, though. CaseWare IDEA is equipped to run a wide range of tests to identify patterns and anomalies in financial data that could point to fraud. These analytic tests can be run on various types of data, including:
- Payments, including those that don’t match invoices, split and rapid payments, etc.
- Travel & Expense – Identify frequent travelers and compliance with policies and procedures; pinpoint travel over holiday periods for potential personal travel
- Inventory analysis, including Dead Stock analysis, Price Change impact, and more
- Salaries and Payroll – Identify multiple pay cheques to the same bank account, compare refund payments to refund policy, etc.
- Segregation of Duties – Evaluate transactional data against control settings; highlight users with powerful profiles/responsibilities, and more
About Alain Soublière:
Alain Soublière has many years of experience working with computer audit software. He worked in a senior management role as the IDEA Product Manager for many years before becoming Director of Product strategy for CaseWare Analytics and more recently the Chief Product Strategist.
Connect: Alain Soublière