Using Data Analytics To Detect Fraud 94th Annual Professional Conference – Engaging Your New World

© 2011 Crowe Horwath LLP 2 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Session Agenda Utilizing data analysis to detect fraud and strengthen internal controls.  Risk assessment process  How data analysis can be used in detecting fraud  Fine-tuning a successful data analytics program  The continuous monitoring process

© 2011 Crowe Horwath LLP 3 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Definition of Fraud  Webster’s Dictionary: “Deceit, trickery; cheating, intentional deception to cause a person to give up property or some lawful right.”  AICPA EDP Fraud Review Task Force: “Any intentional act, or series of acts, that is designed to deceive or mislead others and that has an impact or potential impact on an organization’s financial statements.”  The Accountant’s Handbook of Fraud & Commercial Crime: “Fraud is criminal deception intended to financially benefit the deceiver.”

© 2011 Crowe Horwath LLP 4 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Fraud Triangle

© 2011 Crowe Horwath LLP 5 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® PREVENTION DETECTION INVESTIGATION Fraud Triangle

© 2011 Crowe Horwath LLP 6 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® External Fraud Risk Universe Customers Suppliers CompetitorsEmployees Management Board

© 2011 Crowe Horwath LLP 7 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Evolution of Fraud 1950  Straight-line reporting  Manual processes  Single suppliers  Step-up salary structure 2000  Matrix organizations  Automation  Autonomous authority  Multiple vendors  Performance-based pay 7

© 2011 Crowe Horwath LLP 8 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Spotting Potential Risks - People

© 2011 Crowe Horwath LLP 9 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Should Fraud Be A Concern?  Of 4,000 high school students with A and B averages, 75 percent admit to cheating to get ahead. Ninety- two percent of those who said they cheated were never caught. - Who’s Who Among American High School Students  Almost 80 percent of college students admit to cheating at least once. - The Center for Academic Integrity  The percentage of resumes and job applications that contain lies and exaggerations has been estimated between 30 and 80 percent. - Security Management Magazine

© 2011 Crowe Horwath LLP 10 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® A Study of White Collar Crime Profiles 10 % of the people will never steal 80 % of the people will steal if given the right motive or pressure 10 % of the people will steal regardless of the circumstances

© 2011 Crowe Horwath LLP 11 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Behavioral Red Flags of Perpetrators Source: 2010 ACFE Report To The Nation

© 2011 Crowe Horwath LLP 12 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Primary Internal Control Weakness Observed Source: ACFE 2010 Report To The Nation

© 2011 Crowe Horwath LLP 13 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® The Whistleblower

© 2011 Crowe Horwath LLP 14 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Benefits of Using Data Analytics  Efficiency  Increased analytical capacity  Variety of output representation  Repeatable process

© 2011 Crowe Horwath LLP 15 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Data – Excellent Source of Fraud Evidence 1.Data is objective. 2.Data can be searched and analyzed without arousing suspicion. 3.Data analysis can provide evidence that helps with other areas of the investigation. 4.Provide facts needed to gain confessions during interviews.

© 2011 Crowe Horwath LLP 16 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Data Mining Best Practices Establish expectations: What do I expect to see in the data What do I expect not to see in the data What do I expect an exception to look like What exceptions should I expect

© 2011 Crowe Horwath LLP 17 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Steps to Detect Fraud  Understand the Industry, Business, Unit  What Fraud Schemes Could Occur  Identify the Red Flags Associated With The Fraud Scheme  Test For The Red Flags  Resolve Identified Red Flags

© 2011 Crowe Horwath LLP 18 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® A Series of Examples – Total Disbursements Sort the total payments made to each vendor in descending order. Vendor Name Disbursement To Date Fabric Distributors Inc.$1,873,980 Silk Designer Patterns Inc.$1,792,621 Men’s Apparel Option Inc.$1,021,426 Timothy Wineguard$1,004,372 Threads Unlimited LLC$ 981,982 Wool Makers Incorporated $ 942,533

© 2011 Crowe Horwath LLP 19 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® A Series of Examples – Check Disbursements Vendor ID Vendor Name Disbursement To Date TAILOR MADE SOLUTIONS $32, TAILOR MAIDE SOLUTIONS $35, TAILOR MADE SOLUITIONS $59,012

© 2011 Crowe Horwath LLP 20 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® A Series of Examples – Disbursements by Vendor Know your Alphabet Vendors Vendor Check Date Check Amount AT&T 01/03/09$1, AT&T 02/02/09$1, AT&T02/05/09$2, AT&T02/23/09$1, AT&T03/02/09$1,382.21

© 2011 Crowe Horwath LLP 21 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® A Series of Examples – Disbursements by Frequency Determine if a Vendor is receiving payments more frequently than expected. Vendor # of Payments in 12 months Fabric Distributors Inc.11 Silk Designer Patterns Inc.10 Men’s Apparel Option Inc.11 Timothy Wineguard43 Threads Unlimited LLC10 Wool Makers Incorporated11

© 2011 Crowe Horwath LLP 22 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® A Series of Examples – Duplicates Identify common disbursement amounts, invoice numbers. Vendor Amount Date Invoice TAILOR MADE SOLUTIONS $83, /02/09 CO9291 TAILOR MAIDE SOLUTIONS $85, /02/09 C09293 TAILOR MADE SOLUTIONS $85, /02/09 CO9293 TAILOR MADE SOLUTIONS $83, /02/09 CO9360

© 2011 Crowe Horwath LLP 23 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® A Series of Examples – Invoices Ck. Date PayeeInvoice #Ck # Ck Amount 03/12/09Fabrics Ltd $112,400 03/20/09Fabrics Ltd $112,400 03/31/09Fabrics Ltd $112,500 04/05/09Fabrics Ltd $152,839 04/05/09Fabrics Ltd $153,839 Test for shell companies based on invoice numbers issued.

© 2011 Crowe Horwath LLP 24 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Searching For Addresses Must be consistent in entering data for both the Employee Master and the Vendor Master  St. vs. Street  NE vs. North East  123 Main Street, Apartment B vs.  123 Main Street B  123 Main Street Apartment B

© 2011 Crowe Horwath LLP 25 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Geo-Coding  You entered: 1089 East Harrison Street, Martinsville, IN The Google geocoder found: 1089 E Harrison St, Martinsville, IN 46151, USA street address: 1089 E Harrison St ZIP/postal code: city: Martinsville county/district: Morgan state/province: IN country: USA latitude, longitude: ,   N39° ', W086° '  (precision: address) Source:

© 2011 Crowe Horwath LLP 26 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® CASE STUDY 1 Vice President’s use of Credit Card  Confidential – do not open  Mischaracterized expenses  Duplicate receipts Discovered – Final Bill after taking employment elsewhere.

© 2011 Crowe Horwath LLP 27 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® CASE STUDY 2 Accounts Receivable  Exception to normal registration  Credit Card payments Discovered – Bank procedures

© 2011 Crowe Horwath LLP 28 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® CASE STUDY 3 Department Head  Purchases delivered to home  Asset hard to value Discovered – Asset Audit when DH left employment

© 2011 Crowe Horwath LLP 29 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® THE VISION Assess where you are today, define where you want to be and begin to close the gap. ROI RISK Raw Data – System Reports Ad Hoc Analysis Repeatable Analysis INFORMATION INTELLIGENCE DISPARATE DATA

© 2011 Crowe Horwath LLP 30 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® QUESTIONS

© 2011 Crowe Horwath LLP 31 Audit | Tax | Advisory | Risk | Performance The Unique Alternative to the Big Four ® Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction. © 2011 Crowe Horwath LLP For more information, contact: Brenda Buetow Direct Mobile