recognizing and preventing fixed asset and inventory fraud using data analysis

Recognizing and Preventing Fixed Asset and Inventory Fraud using Data Analysis

March 27, 2013

Special Guest Presenter:Katrina Kiselinchev, CIA, CPA, CFE, CFF

Copyright © 2013 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.


About Jim Kaplan, MSc, CIA, CFE

President and Founder of AuditNet®, the global resource for auditors

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


About Katrina Kiselinchev, CPA, CIA, CFE, CFF

President of Inclusivitie, We Do “SMART”

Integration Partner with IDEA

Experience across industries, audit, fraud, and value

Achieved Value of $5+ Million & ROI of 2000+%, which

included using IDEA’s SMART Analyzer .

Adjunct Professor at Georgia State University

Specific Fraud in Fixed Asset e.g. Mischaracterized Fixed

Asset v. Expense to Increase Bottom Line.


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Disclaimers

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Learning Objectives

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Phantom inventory: How to Know What’s Really in your Warehouses and What’s Not

How Managers Conceal Inventory and Capital Asset Theft by Reporting Fraudulently Inflated Values

Case Studies of Inventory/Fixed Asset Theft and Concealment

Effective Data Analytics Tests Revealing Red Flags of Inventory Theft and Asset Value Misstatement

What to Do After Data Analytics Has Uncovered Signs of Asset Fraud/Misstatement


Agenda

Introduction

The Auditor’s Role

Fraud State of the Union

In the News: Costliest Forms of Fixed Asset & Inventory Fraud

Fixed Asset & Inventory Fraudsters

IMA Building an Asset Company Case

Planning for Fixed Asset and/or Inventory Fraud

Data Gathering & Software Introduction

Discovery with DA: Is There Fraud at IMA Building an Asset

Red Flag Detection & Collusion

Finding Fixed Asset and Inventory Fraud & Next Steps

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The Auditor’s Role

IPPF Standard 1210.A3

Internal auditors must have sufficient knowledge of…available technology

based audit techniques to perform their assigned work


IIA Guidance – GTAG 13

Internal auditors require appropriate skills

and should use available technological

tools to help them maintain a successful

fraud management program that covers

prevention, detection, and investigation.

As such, all audit professionals — not just

IT audit specialists — are expected to be

increasingly proficient in areas such as

data analysis and the use of technology to

help them meet the demands of the job.


Professional Guidance



Source: 2012 ACFE Report to the Nations



Source: 2012 ACFE Report to the Nations


Polling Question 1

Types of Inventory Scheme

(Choose all that apply):

A. Stealing

B. Diverting in Transit

C. Skimming

D. Check Counterfeiting

E. Adding “Phantom Inventory”


Costliest Forms of Fixed Asset and / or Inventory Fraud

According to ACFE's "Report to the Nation on Occupational Fraud and Abuse": > 7% of Fraud Cases in Financial Statement Fraud with < 99 Employees > 15% of Fraud Cases in Non‐Cash Schemes Private Companies at 39%+ Of 2012 Fraud, $200K+ Per Incident Banking & Financial Services, Government, and Manufacturing—Highest Fraud %


Fraud Schemes

Fixed Asset Booking Fictitious AssetsMisrepresenting Asset Valuation Falsifying Assets to Meet Loan Covenants Improper Capitalization Stealing Assets

Inventory Stealing Inventory Diverting Inventory in Transit Falsifying Inventory Numbers to Boost ProfitsManipulating inventory to conceal embezzlement (Phar‐Mor) Falsifying Inventory to meet Loan Covenants Creating “Phantom” Inventory

‐‐ Inventory on books > on hand due to theft or fraudulent reporting


AICPA Fraud Task Force & Six Men &$4B in Fraud

It All Started With a Loan FailureDescription: The perpetrator and his companies were the guarantors of several large loans related to entertainment contracts. The loans were participation loans with several foreign banks. Fraud began with failure to record or disclose a liability caused by a failed loan.Perpetrator’s internal accountants relayed that the bankers had requested that the loss be kept off financial statements and that the external CPAs did not know about it. The fraud grew to include overstatement of assets andunderstatement of liabilities to keep the businesses functioning. Dollar loss: $236 million. What was done to conceal the fraud: Extensive internal collusion helped to hide the fraud.“Audit evidence” provided to external CPAs included falsified contracts and invoices that presented certain assets as company‐ owned.Assets that were sold were not removed from the books, assets that were borrowed were presented as owned, and certain guarantees of loans were not disclosed. How scheme was detected: A whistleblower tipped off authorities to the fraud.


Perpetrators


Case Study 1: IMA ASSETS CO.

Initial Contact:

ORANGE U GLADICALL, Tipster Calls Hotline at IMA Building Co. with anonymous tip that there is massive theft going on in the warehouse, as well as overstatement of assets to meet loan covenants.

“Concerns about All the Fixed Asset & Inventory Fraud”

“Scared to Come Forward”

We Need Someone from the Outside

“We Need a Data Analysis Expert… .. Massive Data”


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Large Amounts of Data Identify Red Flags Faster Increased Coverage Determine Trends Continuous Analysis Process Improvement

Data Analytics for Fraud:Software Overview

Small Amounts of Data Delay in Identifying Red Flags Decreased Coverage Harder to ID Trends

Data Analytics Traditional Auditing

Show First View of IDEA


Software Overview & Introduction

Set Working Folder

Import Data

Check Control Totals


Software Overview & Introduction

Set Working Folder

Import Data

Check Control Totals


IMA Building an Asset Co 1000+ Assets with No Physical Review

Inability to Generate + Cash Flows while Reporting Earnings Growth

No Inventory Comparison of Price v. Unit Cost

Caught Operations Manager Stealing a TV Via Video Camera

Tight Loan Covenants & EBITDA Nearing Every Quarter

Two People in Fixed Assets and Inventory at Corporate

All Locations Decentralized

Operations Manager Fixed Asset Clerk

Counted On Tapes Not Working Reviewed Tapes & Notified Management

No Raise in 3+ Years Manager Says Okay to Not Do Physical Counts

10 Year Employee TV Worth $500+

Operations Manager Terminated After Exit Interview

Claims Happened Only 1 Time

Needed Money to Help Pay Rent

.


Polling Question 2

What Is/Are Added Tests for IMA Building an Asset Co. to Consider?

A. Add Test of Recalculation of Depreciation

B. Add Test of Comparison of Anticipated Value to Book Value

C. Neither of the Above

D. Both a and b


Client Communication:Planning for Fixed Assets and/or

Inventory Fraud

Walk‐through of Asset & Inventory Addition & Screening

Procure‐to‐Pay Cycle & COGS Transfer

Complete Audit Plan with Data Analysis Incorporated

Include Capital Purchase & Inventory Process & Gap

Comparisons to Similar Vendor & Contract Pricing


Observations Found

No Asset Valuation Other than Write‐Up With Acquisitions

No Policy or Review of Capital vs. Expense

No Recalculation of Depreciation or Cost v. Depreciation

No Capital or Inventory Budgetary Review

No Oversight of Transfer of Inventory to COGS

Monthly Inventory Turned in From Site

Recurring Negative Cash Flows


Data Gathering for Data Analysis

Request All Meta Data Fields & FilesInventory

Vendor Name Vendor ID & Site & Address Purchase Order History for X Time Period Posted & Approved by ID Budgets by Vendor / Item Comments Unit Cost Transfer to COGS Date of Sale Date of Transfer Changes to Fields & Who Made Them

Assets:Asset ID Depreciation for Period Total Depreciation Book Value Item Description Date of Sale Date of Disposal Loss / Gain on Sale


Discovery with Data Analysis:Is There Fraud at IMA?

Audits to Perform:

Inventory:

Join for Cost v. Price

COGS Transfer

Fixed Assets:

Review Cost v. Book Value

Review Cost v. Value

Duplicates

Recalculate Depreciation

Come Up with Tests for Sales, Accounts Payable, Closing Entries

Request Data in Line with Tests.


Polling Question 3

Which Tests Should IMA Run Initially for Inventory?

A. Join Comparison Price v Cost

B. Recalculate Depreciation

C. COGS Transfer to Sale

D. Both a and c


Discovery with DA: Spend

Audits to Perform:

Inventory:

Summarize by Item

Price v. Cost

Duplicate Tests

COGS Transfer

Red Flag #1:‐ #3 Pricing Issues on 52” & Blu‐Ray, Transfer $, Dates


Discovery with DA: Duplicates

Red Flag #4: Same Assets Listed Multiple Times


Polling Question 4

Which Red Flags Were Discovered with Initial Inventory Testing?

A. Pricing Issues on DVDs

B. Pricing Issues on TVs 52”

C. COGS Transfer Dates e.g. Expense Recognition

D. B & C


Polling Question 5

Which of the following is/are Red Flag(s)/ Finding(s) Identified in IMA Building?

A. Improper Depreciation CalculatedB. Vendor Spend is Excessive Over Budgeted AmountsC. Terminated Employees Receiving PaychecksD. None of the Above


Discovery with DA: Cost v. Book Value & Depreciation

Red Flag #5 ‐ #7:Significant Discrepancies in Cost v. Book Value

Cost v. Anticipated ValueImproper Depreciation Calculation


Total Issues Found & Next Steps

1) Complete Summary of Data & Findingsa) Total by Inventory Discrepanciesb) Total by Asset Discrepanciesc) Total by Depreciation Discrepancies

2) Determine Additional Tests to Run & Perform3) Discuss Findings with CEO Initially & Recommendations4) Complete Interviews with Employees 5) Review Gaps & Control Deficiencies & Provide Recommendations 6) Recommend Management Review for Cost v Benefit & Implement ASAP7) Determine if Client has Fraud Insurance Rider. If not, recommend.8) Contact Insurance Carrier (if applicable) & Begin Claim Process.9) Contact Authorities & File Report.10) Determine if Prosecution is Viable e.g. Dollar Amount, Management, etc.11) Complete Report (See ACFE.com) 12) Complete Supporting Doc for Insurance Co. & Authorities


Prevention and Detection at IMA Building:Assets

Obtain Expected Industry Valuation After X Period & Decline By Year

Compare Unit Costs & Assets vs. Industry Standards

Add System Preventative Controls e.g. X Value Per X Asset

Default Depreciation to X System Level on Set‐Up

Add Test of Comparison of Anticipated Value to Book Value

Recommend & Implement Capital & Inventory Budgetary Review

Inventory

Add Test of Inventory to Transfer Period Review

Add Control of Oversight of Transfer of Inventory to COGS

Add Surprise Physical Counts for Inventory & Fixed Assets

Perform Physical Counts of All Assets & Inventory of High Volume Sites

Extrapolate and Adjust Asset & Inventory Values

Preventing Fixed Asset & Inventory Fraud


Preventing Fixed Asset & Inventory Fraud

Continuous Monitoring Complete Risk Assessment & Annual Audit Plan with Data Analysis Determine Monthly & Quarterly Tests by Priority Implement Data Analysis Testing Perform & Complete Ongoing Control Assessments


Polling Question 6

What Could Have Prevented IMA’s Asset Issues ?

A. Procurement Manager from Sole Vendor Selection

B. System Depreciation Calculation

C. Implement Data Analysis Testing

D. None of the above.


Thank You!

Website: http://www.fraudresourcenet.com

Jim KaplanFraudResourceNet™

800-385-1625 [email protected]

Peter GoldmannFraudResourceNet™

[email protected]

Katrina KiselinchevInclusivitie, LLC832-236-4778

[email protected]://www.inclusivitie.com


Questions?

Any Questions?Don’t be Shy!


Coming Up Next Month

Detecting Healthcare Vendor Fraud Using Data Analysis (DA-2) April 17

Anti-Fraud Professionals’ Role in Building an Anti-Fraud Culture (OF-1) April 23

recognizing and preventing fixed asset and inventory fraud using data analysis

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