1. Effective General Ledger and Journal Entry Fraud Testing Using Data Analytics April 23, 2014 Special Guest Presenter: Rich Lanza Copyright 2013 FraudResourceNet LLC 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.

2. Copyright 2013 FraudResourceNet LLC 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 IIAs 2007 Bradford Cadmus Memorial Award. Author of The Auditors Guide to Internet Resources 2nd Edition Copyright 2013 FraudResourceNet LLC Richard B. Lanza, CPA, CFE, CGMA Over two decades of ACL and Excel software usage Currently builds continuous monitoring that is free for clients (using cost recovery techniques) Has written and spoken on the use of audit data analytics for over 20 years. Received the Outstanding Achievement in Business Award by the Association of Certified Fraud Examiners for developing the publication Proactively Detecting Fraud Using Computer Audit Reports as a research project for the IIA Recently was a contributing author of: Global Technology Audit Guide (GTAG #13) Fraud in an Automated World - IIA Data Analytics A Practical Approach - research whitepaper for the Information System Accountability Control Association. Cost Recovery Turning Your Accounts Payable Department into a Profit Center Wiley & Sons. Please see full bio at www.richlanza.com 3. Copyright 2013 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. 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Copyright 2013 FraudResourceNet LLC 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 5 4. Copyright 2013 FraudResourceNet LLC Learning Objectives Learn to set up a program of regular fraud risk management surrounding financial statement frauds. How to quickly gather report ideas and techniques for analysis, as well as, obtain a list of some of the top fraud tests by process area. Prioritize the top red flags of financial statement fraud, based on research culled from recent field surveys. Learn to complete improved risk assessments to assess financial risk in the organization, using data. Understand the best and easiest other non-analytic detection steps to implement immediately. See how in Excel to run key proactive fraud tests in the areas of the general ledger overall, manual journal entries to the ledger, and completing other financial statement analysis. Graphing the ledger activity, and trial balance data for multiple periods to paint a picture of change in the organization using Excel conditional formatting. How fraud scoring can use a customized weighting system to flag suspicious transactions. Use an Excel macro that will search a list of key words in your general ledger (words that are concerning like Balance Account, Later Reconciliation, etc.). Assessing Risk and Building the System 5. Copyright 2013 FraudResourceNet LLC Fraud Risk Assessment Sub- Categories Page 8 Copyright 2013 FraudResourceNet LLC Recent COSO Study Financial Statement Fraud www.coso.org/documents/COSOFRAUDSTUDY2010_001.pdf 6. Copyright 2013 FraudResourceNet LLC Financial Statement Indicators Increased current or quick ratio Increased working capital Increased days sales outstanding / Decreased receivable turnover Increased days sales in receivables index Increased profit margin Increased gross margin Increased gross margin index Increased sales and steady or increased inventory turnover ratio Increased sales and steady or decreased payable turnover ratio Increase in allowance for doubtful accounts in the period subsequent to the current year under review. Decrease in cash flow ratios Increase in receivables to sales index Copyright 2013 FraudResourceNet LLC Proactively Detecting Fraud Using Computer Reports - IIA Research Paper Page 11 See the IIAs website at www.theiia.org 7. Copyright 2013 FraudResourceNet LLC Top Sided Journal Entries Risk Factor Reports Entries to revenue with offsets NOT in accounts receivable or cash Extract nonstandard or manual journal entries (versus a created system such as an accounts payable ledger posting) for further analysis. Extract journal entries posted on weekends and holidays. Extract journal entries relating to the prior year that were made just immediately following a fiscal-year end. Extract general ledger transaction amounts (debit or credit) that exceed the average amounts for that general ledger account by a specified percentage. (Five times the average is the default.) Extract journal entries that equate to round multiples of 10,000, 100,000, and 1,000,000. Extract journal entries with key texts such as plug and net to zero anywhere in the record. Extract journal entries that dont net to zero (debits less credits). Extract journal entries made to suspense accounts and summarize by the person entering and corresponding account numbers. Copyright 2013 FraudResourceNet LLC Best Practice Approach on Fraud Find It Before It Finds You Think Prevention vs. Future Detection Identify issues earlier in their lifecycle Build a aura of deterrence Select some entries just to keep people on their toes Build a Continuous Review Process Technology Minimal staff time / external assistance Keep Improving the Model Model on identified frauds Remove false positives to isolate interesting events 8. Copyright 2013 FraudResourceNet LLC Journal Entry Surveillance System Overall Review Objectives Monitoring of the behavior, activities, or other changing information Identify unusual changes in activity Over time By account sequence In amount In value (I/S, B/S, Net effect) In key focus areas (i.e., revenue, location) In enterers behavior or words entered Key concern accounts Monitor unauthorized enterers Reconcile GL activity to trial balance figures (completeness) Copyright 2013 FraudResourceNet LLC Polling Question #1 Who has involvement in close to 90% of all financial statement fraud? Internal Audit CEO or CFO Account Manager COO Page 15 9. Copyright 2013 FraudResourceNet LLC Analytic Command Center 1 6 Analytic Command Center 1.Accounts Payable 2.Accounts Receivable 3.Financial Statement 4.General Ledger 5.Inventory 6.Payroll 7.Revenue Data Mart Local Analytic Toolkit Feedback from all locations Recovery Auditors Shared Services Copyright 2013 FraudResourceNet LLC Cost Recovery Opportunity Analysis Expenses for Analysis Primarily SG&A Cost of goods sold (i.e., freight) Data Files General Ledger (trial balance) A/P Invoice Detail Distribution Purchase Orders Pricing List 17 10. Copyright 2013 FraudResourceNet LLC Profit Opportunities Accounts Payable Audit Fee Benchmarking Advertising Agency Document Fleet Freight Health Benefits Lease Media Order to Cash 18 Project Fraud Real Estate Depreciation Sales & Use Tax / VAT / R&D tax Strategic Sourcing Telecom Travel and Entertainment Utilities Copyright 2013 FraudResourceNet LLC Recover first and build a clean-up budget People need to get hit before they see the pain in getting hit Consulting firms come in to help improve business processes People, process, and technology budgets easily are made once the previous findings are realized 19 11. Copyright 2013 FraudResourceNet LLC Query Viewpoints Copyright 2013 FraudResourceNet LLC Specific Tests Based on the 5 Ws Who Summarize journal entries by the persons entering to determine if theyre authorized. What Summarize journal entries by account and repetitive extracts (more than 50 instances) and unique account sequences used in the journal entry (based on the first five debit and credit postings). Extract nonstandard or manual journal entries (versus a created system such as an accounts payable ledger posting) for further analysis. Stratify size of journal entries based on amount (using the debit side of the transaction). Summarize general ledger activity on the amount field (absolute value of debit or credit) to identify the top occurring amounts. Then summarize activity by account and the amount identified for the top 25 appearing amounts. Scatter-graph general ledger account (debit and credit amounts separately) and numbers of transactions. 12. Copyright 2013 FraudResourceNet LLC Specific Tests Based on the 5 Ws When Extract journal entries posted on weekends and holidays. Extract journal entries relating to the prior year that were made just immediately following a fiscal-year end. Summarize journal entry credits and debits processing by day, month, and year. Where Extract journal entries made to suspense accounts and summarize by the person entering and corresponding account numbers. Extract journal entries to general ledger accounts known to be problems or complex based on past issues (errors of accounting in journal subsequently corrected by accounting staff or auditors) at the company or the industry in general. Extract debits in revenue and summarize by general ledger account. Summarize journal entries by the persons entering to determine if theyre authorized. Copyright 2013 FraudResourceNet LLC Specific Tests Based on the 5 Ws Why Extract general ledger transaction amounts (debit or credit) that exceed the average amounts for that general ledger account by a specified percentage. (Five times the average is the default.) Extract journal entries that equate to round multiples of 10,000, 100,000, and 1,000,000. Extract journal entries with key texts such as plug and net to zero anywhere in the record. Extract journal entries that are made below set accounting department approval limits especially multiple entries of amounts below such limits. Extract journal entries that dont net to zero (debits less credits). 13. Copyright 2013 FraudResourceNet LLC Query Viewpoints in Action Personnel Analysis Adjustments by employee Processing by employee Contextual Summarizations Transaction types Time Trending Month, week, and day / Also by department Last month to first 11 months Transactions at the end of and start of a fiscal year Copyright 2013 FraudResourceNet LLC Trend & Statistical Analysis Monthly activity by type can be trended and related to industry/company norms 14. Copyright 2013 FraudResourceNet LLC Polling Question #2 What is an example of a WHAT question in the general ledger analytical tests? Extract entries entered by an unauthorized user Identify weekend journal entries Summarize entry by account type Summarize by who entered the entry Page 26 Specific Journal Entry and Other Ledger Analytics 15. Copyright 2013 FraudResourceNet LLC How to Use Excel As An Audit Tool Free whitepaper on Excel: http://auditsoftware.net/documents/excel- audit-software.pdf ActiveData for Excel Link Discounted $199 software purchase link - http://www.informationactive.com/asv Page 28 Copyright 2013 FraudResourceNet LLC Useful Excel Functions ABS() - Returns the absolute value of an expression (e.g., ABS(Check_Amount) LOWER() Converts a character field to all lower case. LEFT() Returns the left number of characters (as defined by the user) for the selected field. MOD() Can be used to determine whether a number is a round number (i.e., MOD(A1,1000.00)=0.00. RIGHT() Returns the right number of characters (as defined by the user) for the selected field. UPPER() - Converts a character field to all upper case. WEEKDAY() - Returns the day of the week corresponding to a date. The day is given as an integer, ranging from 1 (Sunday) to 7 (Saturday), by default. 16. Copyright 2013 FraudResourceNet LLC Polling Question #3 What is the function used to test for round dollars in amounts? LEFT() MOD() TRIM() ROUND() Red Flag Word Searches 17. Copyright 2013 FraudResourceNet LLC Fraud Red Flag Word Searches Page 32 One could build a database of suspicious words and then search the entire data file for these words, looping back to the table to get the next word: bribe fraud plug etc. Summaries can be done by person and collectively for additional collusion reviews Copyright 2013 FraudResourceNet LLC Fraud Red Flag Word Searches Page 33 What You Need Word Search Table Table Being Searched How You Do It SPLIT the field to be searched into words Convert data to be the same format Lookup to the word lookup list using VLookup 18. Unique Journal Entry Test Manipulating Data Graphing for Improved G/L Understanding 19. Copyright 2013 FraudResourceNet LLC Charting Types Column, Line, Bar charts simple Column, Line, Bar charts (two-axis) - intermediate Pie chart - shows size of items in one data series proportional to the rest of the data Area charts show components within each data XY or Scatter graphs shows relationship among numerical values in several data series Page 36 Copyright 2013 FraudResourceNet LLC Graphing the Data With your mouse pointer anywhere in the Pivot, select the Pivot Chart button Whatever is in the Pivot will be added to the Chart Page 37 20. Copyright 2013 FraudResourceNet LLC Grouping Date Ranges Page 38 Copyright 2013 FraudResourceNet LLC Scatter Graph Page 39 21. Copyright 2013 FraudResourceNet LLC GeoMapping - Map Point Page 40 Copyright 2013 FraudResourceNet LLC GeoMapping Batch Geo Page 41 22. Copyright 2013 FraudResourceNet LLC GeoMapping BatchGeo Page 42 Copyright 2013 FraudResourceNet LLC Dashboarding Graphing Page 43 23. Copyright 2013 FraudResourceNet LLC Polling Question #4 What Pivot Table function is used to create a chart? Pivot Data Group Date Pivot Chart Line Chart Narrowing the Focus With Coding and Scoring 24. Copyright 2013 FraudResourceNet LLC We Can Also Narrow the Data By Summarizing on Types We can add Code fields to the data for: Type of account Revenue, expense, etc. Balance Sheet impact and strata category Income Statement impact and strata category Whether the entry is unique in relation to all prior data If the entry has a revenue posting in it Which reports the transaction data appears If the entry is associated with a key words table of unusual words Whether the entry appears on a high amount strata increase in the month to the prior year Entries with amounts that have a high volume increase in the month to the prior year based on percentage of total activity The rank, average value, and std deviation for that account, if relevant This helps code further which accounts within entries had deviations.only ones with the average value 0 Copyright 2013 FraudResourceNet LLC Transactional Score A single score is given to each transaction based on its severity (number of attributes it meets) Scores are summarized by enterer, vendor, and department (buyer) Scattergraphs are completed of the results by: Enterer Business Partner Department focusing on severity/volume and differences in these variables Sampling is completed in each quadrant 25. Copyright 2013 FraudResourceNet LLC Approach - Transactional Score Benefits The best sample items (to meet your attributes) are selected based on the severity given to each attribute. In other words, errors, as you define them, can be mathematically calculated.so best to tailor them Instead of selecting samples from reports, transactions that meet multiple report attributes are selected (kill more birds with one stone). Therefore a 50 unit sample can efficiently audit: 38 unbalanced entries 22 round entries 18 unique entries .and they are the best given they are mathematically the most severe. 48 Copyright 2013 FraudResourceNet LLC The Power of VLookup() Matching vendor to employee addresses Page 49 26. Copyright 2013 FraudResourceNet LLC Transactional Scoring The result is a sampling methodology that is now based on Risk as you define Page 50 Copyright 2013 FraudResourceNet LLC Summaries on Various Perspectives 51 Summarizeby dimensions(andsub dimension)topinpoint withinthecubethe crossoverbetweenthetop scoredlocation,time,and placeoffraudbasedon thecombinedjudgmental andstatisticalscore 27. Copyright 2013 FraudResourceNet LLC Polling Question #5 What function is mainly used to align all scores in a spreadsheet? MOD() FIND() MID() VLOOKUP() Page 52 Copyright 2013 FraudResourceNet LLC Questions? Any Questions? Dont be Shy! 28. Copyright 2013 FraudResourceNet LLC Coming Up Next Month 1. "Catch T&E and P-Card Fraudsters With Data Analytic Power Tools, May 7, 11:00 AM EDT 2. "Vendor Master File Fraud Detection and Prevention Using Data Analytics, May 14, 11:00 AM EDT Copyright 2013 FraudResourceNet LLC Thank You! Website: http://www.fraudresourcenet.com Jim Kaplan FraudResourceNet 800-385-1625 jkaplan@fraudresourcenet.com Peter Goldmann FraudResourceNet 800-440-2261 pgoldmann@fraudresourcenet.com Rich Lanza Cash Recovery Partners, LLC Phone: 973-729-3944 rich@richlanza.com