Examples Inventory

3/19/2014
How to Use Data Analytics to

Expose Fixed Asset and Inventory
Fraudsters
Special Guest Presenter:
Stefan Davis, TopCAATs
March 19, 2014
CopyrightFraudResourceNet 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
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3/19/2014
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 Stefan Davis, MEng, MBA
Director at Reinvent Data

Former Big-4 Auditor and Consultant
Co-developer of TopCAATs, an Excel based CAATs
package
Writer of numerous eBooks and whitepapers on
CAATs and data analytics for Auditors
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3/19/2014
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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
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3/19/2014
Learning Objectives
Phantom inventory: How to know whats really in your

warehouses and whats 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
In the news: Costliest forms of fixed asset and inventory
fraud
Fixed asset and inventory fraudsters
AssetCo case
Planning for fixed asset and/or inventory fraud
engagements
Data gathering and software introduction
Discovery with data analysis: Is there fraud at AssetCo
Red flag detection and collusion
Finding fixed asset and inventory fraud and next steps
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Costliest forms of fixed asset

and inventory fraud
According to ACFE's "Report to the

Nations on Occupational Fraud and
Abuse:
> 7% of Fraud Cases in Financial
Statement Fraud with < 99
Employees
> 15% of Fraud Cases in Non-Cash
Schemes (i.e. financial statement
manipulation)
Private Companies at 39%+ of 2012
Fraud, $200k+ per Incident
Banking & Financial Services,
Government, and Manufacturing Examplefixedassetcycle
Highest Fraud % Source:rksolution.co.in
Fraud schemes
Fixed Assets
Booking fictitious assets
Misrepresenting asset valuation
Improper capitalization
Asset theft
Inventory
Stealing inventory
Diverting inventory in transit
Manipulating inventory quantities on hand / creating phantom
inventory
Inflating inventory costs
Misrepresenting inventory valuation
Reversing inventory adjustments at period-end
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Polling Question 1
What percentage of all frauds are non-cash schemes
(e.g. financial statement frauds)?
A 5%
B 10%
C 15%
D 25%
AICPA Fraud Task Force &

Six Men & $4bn in Fraud
Itallstartedwithaloanfailure
Description: 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.
Perpetrators 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 and understatement 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 the scheme was detected: A whistleblower tipped off
authorities to the fraud.
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Perpetrators of fraud
Data analytics software
Benefits Data analytics Traditional audit techniques

Save time Identify red flags quickly Delays in identifying red flags
Computerised procedures Manual procedures
Reduce risk Test entire populations Test a sample from the population
Perform continuous analysis Not feasible to perform continuous
analysis
Add value Identify every individual anomaly Identify large or ongoing anomalies
Determine trends Difficult to determine trends
Create Couple
Handle ofamounts
huge TOPCAATS selling points
of data Handle limited amounts of data
opportunities
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Principles of Using Data Analytics

to Detect Fraud
Using set rules to identify transactions
of higher risk
Every company is different, has a
different environment, different systems,
different risks, etc.
Need to use judgment to select testing
Need to use judgment to evaluate
results
Just because a transaction matches a
red flag doesnt mean fraud is present
Using data analytics does not guarantee
finding fraud or finding all fraud!
The Data Analysis Cycle
Planyour
testing
Request
Review
Data
Continuous
Learning
Evaluateand Obtainand
Followup CleanData
Carryout
testing
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TopCAATs - Getting Started
1. Open / import data file

2. Cleanse data (if necessary)
3. Check column statistics (check-totals)
AssetCo Case Study: First Contact
Ima Tipster calls AssetCos

whistleblowers hotline with
anonymous tip that:
There is massive theft going on in
the warehouse
They think assets are being
overstated to meet loan covenants
They have general concerns about
fixed asset and inventory fraud
Theyre scared to come forward or
raise anything with management
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AssetCo: Interview Findings
1000+ assets with no physical review (maybe

this wasnt a material site?)
Profits are increasing but cash flow is negative
Havent performed a comparison of sales price
vs. book value for inventory
Caught Operations Manager stealing stock via
CCTV
Tight loan covenants, EBITDA close to
breaching covenants every quarter
Two people are responsible for fixed assets and
inventory but they are centralized (Corporate)
All inventory-holding locations are decentralized
Polling Question 2
Choose all of the following that are components of the
data analytics cycle:
A Request data
B Clean data
C Conduct testing
D Review
E All of the above
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AssetCo: Interview Findings
Operations Manager
Assumed CCTV cameras were not working
Thought he would never get caught
Hadnt had a raise in over 3 years
Worked at AssetCo for 10 years
Claims he had not stolen anything before
Needed the extra money to pay the rent
Fixed Asset Clerk

Reviewed CCTV tapes and notified management
Told by manager that its okay not to do physical counts
Planning
Walk through processes

Asset additions, disposal and transfer
Inventory booking in and out
Purchase to Pay (P2P) cycle and CoGS transfer
Understand key controls in place and gaps
e.g. Inventory counts, fixed asset verification
Ensure you include those operated both locally and centrally
Understand relevant and notable history
Process changes, significant acquisitions, inventory transfers, etc.
Develop hypotheses
Develop plan to test hypotheses incorporating data
analysis
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Assertion Risks
When considering financial statement fraud

Completeness are there any assets off-balance sheet?
Existence are these assets actually there?
Accuracy are the costs of these assets correct?
Valuation are the values of these assets appropriate?
Ownership does the company have rights to the assets?
Presentation are the assets correctly classified?
Polling Question 3
Which three of these would normally be the primary
focus when looking for inventory asset fraud using
data analysis?
A Completeness
B Existence
C Accuracy
D Valuation
E Ownership
F Presentation
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AssetCo: Planning observations
No asset revaluation other than write-up with

acquisitions
No policy in relation to capital vs expense items and no
review
No recalculation of depreciation (should have a system
control but someone could get around it).
No capital or inventory budgetary review
No oversight of transfer of inventory to CoGS
Monthly inventory values are submitted by each site (no
corporate-wide inventory system)
Inventory transfer in from another site before year-end
Recurring negative cash flows
Initial Test Plan

Fixed Assets
Compare asset register totals to ledgers
Recalculate depreciation
Review asset lives for each category
Identify duplicate assets
Review for incorrectly capitalized assets
Review significant additions
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3/19/2014
Initial Test Plan

Inventory
Check totals to corporate submissions
Join for Stock, Sales and Purchase data sources
Test stock against Benfords Law
Compare stock value to purchase prices
Review for aged / obsolete inventory
Compare stock value to sales prices
Review for purchase of obsolete inventory
Check CoGS transfer dates
Compare dispatched vs received for inter-site transfer
Also consider tests with sales, accounts payable, closing
entries
Data gathering
Request all data fields and files in line with desired tests
Inventory Sales
Part number Sold quantity
Part description Sales price
Unit cost
Transfer to COGS
Quantity
Total value Customer ID, name, address
Part status (e.g. current, obsolete) Date of sale
Inventory purchases Date of transfer to CoGS
GRN date
GRN quantity
Unit cost
Vendor ID, name, address
Purchase order number
Posted by and approved by ID
Budgets by vendor or product
Comments
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3/19/2014
Data gathering (contd)

Request all data fields and files in line with desired tests
Fixed assets
Asset ID
Depreciation for period
Accumulated depreciation
Net book value
Asset description
Date of purchase
Date of sale
Date of disposal
Loss / Gain on Sale
Acquisition revaluations and dates
Polling Question 4
Which of the following are useful tests for inventory
manipulation?
A. Test stock against Benfords Law

B. Compare stock value to purchase prices
C. Review for aged / obsolete inventory
D. None of the above
E. All of the above
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Getting the data
Speak to IT departments not just process owners

Flat files (e.g. .csv) are best
Be specific the more information you can provide the
better
Use a data request template
You can find an example data request template at

www.topcaats.com/datarequestform
Assets - Red flags
1. Assets under-depreciated
2. Various lives within an asset category
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Assets - Red flags
3. Duplicated assets
4. Repairs and maintenance capitalized
Assets - Red flags
5. Low value items capitalized
6. Significant additions
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Inventory - Red flags
1. Stock listing totals not agreeing to ledger (E)
2. Receipt of obsolete inventory (E/V)
3. Inventory site transfer received despatched (E)

Add screenshot
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4. CoGS transfer in period after sale made (E)
5. Stock value much greater than last purchase prices
6. Stock value not between max/min purchase prices
7. Values not conforming to Benfords law
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8. Sales prices lower than cost held in stock
9. Aged inventory
Polling Question 5
Sales prices that are lower than cost held in stock is a
red flag of inventory fraud
A True
B. False
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Next steps
1. Compile a summary of data used and findings in each area

2. Determine any additional tests required and perform
3. Discuss initial findings with CEO and recommend follow-up steps
4. Conduct follow-up interviews with employees
5. Review control gaps and deficiencies and make recommendations
6. Recommend management develop a business case and implement
ASAP
7. Determine if client has fraud insurance rider, recommend consideration
8. Contact insurer (if applicable) and begin claim process
9. Contact the authorities and file a report
10. Determine if prosecution is viable
11. Complete report (see ACFE.com)
12. Compile required supporting documentation for insurer and authorities
Fraud prevention
Fixed Assets
Implement capital vs expense items policy
Add review controls for capitalization of assets over $X
Add system controls to prevent capitalization of assets under $X
Default depreciation calculation based on asset category
Add test of comparison of anticipated value to book value
Implement capital and inventory budgetary review
Add surprise physical verification of assets
Obtain expected industry valuation and decline by year for significant assets
Inventory
Add control at month-end over CoGS transfer period
Add system controls over price and quantity adjustments
Implement provisioning policy for aged / obsolete stock
Perform audited counts of all inventory of high volume sites (PI or annual)
Corporate oversight of significant transfers between sites
Implement inventory budgetary review
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3/19/2014
Fraud prevention
Continuous Monitoring
Complete risk assessment and develop annual audit plan
Determine monthly and quarterly testing by priority
Implement data analysis testing and incorporate into annual audit
plan
Perform and complete ongoing control assessments
Questions?
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3/19/2014
Thank You!
Peter Goldmann
FraudResourceNet LLC
800-440-2261
www.fraudresourcenet.com
pgoldmann@fraudresourcenet.com
Jim Kaplan
FraudResourceNet LLC
800-385-1625
www.fraudresourcenet.com
jkaplan@fraudresourcenet.com
Stefan Davis
Reinvent Data Ltd
www.topcaats.com
stefan.davis@reinventdata.com
ComingUp
Upcoming March Anti-Fraud

Webinar
"Background Checks: Best

Practices for Reducing Employee
Fraud, April 17, 2014
"Effective General Ledger and
Journal Entry Fraud Testing Using
Data Analytics, April 23, 2014
Sign up at:
http://www.fraudresourcenet.com
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3/19/2014

How to Use Data Analytics to

About Jim Kaplan, MSc, CIA,

President and Founder of AuditNet, the global

About Peter Goldmann, MSc., CFE

President and Founder of White Collar Crime 101

Monthly Columnist, The Fraud Examiner, ACFE

About Stefan Davis, MEng, MBA

Director at Reinvent Data

The views expressed by the presenters do not necessarily represent

Phantom inventory: How to know whats really in your

Costliest forms of fixed asset

According to ACFE's "Report to the

AICPA Fraud Task Force &

Data analytics software

Benefits Data analytics Traditional audit techniques

Principles of Using Data Analytics

The Data Analysis Cycle

TopCAATs - Getting Started

1. Open / import data file

AssetCo Case Study: First Contact

Ima Tipster calls AssetCos

AssetCo: Interview Findings

1000+ assets with no physical review (maybe

AssetCo: Interview Findings

Fixed Asset Clerk

Walk through processes

When considering financial statement fraud

AssetCo: Planning observations

No asset revaluation other than write-up with

Initial Test Plan

Initial Test Plan

Data gathering (contd)

A. Test stock against Benfords Law

Getting the data

Speak to IT departments not just process owners

You can find an example data request template at

Assets - Red flags

2. Various lives within an asset category

Assets - Red flags

4. Repairs and maintenance capitalized

Assets - Red flags

5. Low value items capitalized

Inventory - Red flags

1. Stock listing totals not agreeing to ledger (E)

2. Receipt of obsolete inventory (E/V)

Inventory - Red flags

3. Inventory site transfer received despatched (E)

Inventory - Red flags

4. CoGS transfer in period after sale made (E)

5. Stock value much greater than last purchase prices

Inventory - Red flags

6. Stock value not between max/min purchase prices

7. Values not conforming to Benfords law

Inventory - Red flags

8. Sales prices lower than cost held in stock

1. Compile a summary of data used and findings in each area

Upcoming March Anti-Fraud

"Background Checks: Best

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