a research taxonomy: the application of data mining to fraud detection glen l. gray california state...
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A RESEARCH TAXONOMY:THE APPLICATION OF DATA MINING TO FRAUD DETECTION
Glen L. Gray California State University at Northridge
Roger Debreceny University of Hawai‘i at Mānoa
8th Biennial Symposium onInformation Integrity and Information Systems AssuranceOctober, 2013
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Introduction
• Observation• The application of data mining to fraud detection during
financial audits is at an early stage of development and researchers take a scatter-shot approach
• Objectives of our study• Explore the application of data mining techniques to fraud
detection• Develop a taxonomy to support and guide future research
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Data Examination Tools
Data
Analysis
Data Mining
Data
Extraction &
Query
Software sophistication
Pre
dic
tive
Po
wer
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GRAB THELOW HANGINGFRUIT ..
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Return on investment in data mining
Spread investment in datamining over many clients
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Return on investment in data mining
Spread investment in datamining for one client over
many possible fraud objects
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LOOKING FOR THE SWEET SPOT .. Where can we leverage value from data mining in fraud detection?
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Looking for the sweet spot!
Scheme Scheme Scheme Scheme Scheme
Fraud
Fraud
Fraud
Fraud
Fraud
Fraud
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Looking for the sweet spot!
Scheme Scheme Scheme Scheme Scheme
Fraud
Fraud
Fraud
Fraud
Fraud
Fraud
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Looking for the sweet spot!
Scheme Scheme Scheme Scheme Scheme
Fraud
Fraud
Fraud
Fraud
Fraud
Fraud
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Fraud Class by Evidence Scheme
Gao, L., and R. P. Srivastava. 2011. The Decomposition of Management Fraud Schemes: Analyses and Implications. Indian Accounting Review 15 (1):1-23.
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Audit Specific Data Mining Scoring Scheme
Source TargetSignals Data Types Semantics
Scoring Elements
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Fraud Class, Evidence Scheme and Data Mining
Fak
e D
ocu
men
ts
Co
llu
sio
n w
ith
th
ird
Par
ties
Alt
ered
Do
cum
ents
Hid
den
Do
cum
ents
Cli
ent
Mis
rep
rese
nta
tio
ns
Fak
e P
rod
uct
s
Rel
ated
Par
ties
Sp
read
ing
of
Fra
ud
ule
nt
Item
s
amo
ng
Acc
ou
nts
Rev
ersa
l A
cco
un
tin
g E
nti
ties
Fictitious Revenue
Premature Revenue Recognition
Overstated Assets/Understated Liabilities
Nil Low
Fictitious Assets LowMedium
Other Measures to Overstate Revenue
Medium
High
Overvalued Assets/Equity
High
Omitted Disclosure
Frequency Data MiningApplicability
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FUTURE RESEARCH
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Themes in Data Mining
• Mining External Information as Part of the Planning Phase
• Mining Client Non-financial performance data • Analysis of Journal Entries • Mining Accounting Information Systems • Email and other textual sources