This is part two of a blog post series examining a worked exampled using fraud data analytics on a complex fraud scheme.
In this post we will look at how to use fraud data analytics designed to uncover the complex fraud scheme and the fraud audit procedures designed to provide creditable evidence that the scheme is being perpetrated by the budget owner.
The fraud audit starts with using fraud data analytics to identify purchase orders and corresponding invoices that match the profile of the described fraud scheme. Once the sample is created, the auditor performs fraud audit testing procedures to determine if there is creditable evidence to recommend an investigation.
Since the scheme starts with corrupting the bid process, as seen in the previous blog post, you can exclude all purchase orders below the dollar threshold for bidding. You might wonder what about splitting the purchase orders to stay below the bid level? Simple. That’s a different scheme. You can add the scheme to your list, but our approach is one scheme at a time.
The fraud data analytics should create two homogenous data files:
Whether you create two physical files, or one conceptual file is a matter of style. The next step is to link the invoices to each purchase order file.
There’s a need to stress this point. We suggest creating smaller homogenous data files for three reasons:
Other enhancements to the fraud data analytics include:
Next, we move onto the purchase orders with changes. Start with computing the dollar value of the change from the original purchase order amount to the final change order and the percentage of change.
Using the arbitrary amount, filter out the purchase orders with lower total dollar change or low percent of change. Now perform the same analysis as for purchase order with no change to the total amount.
If you have read my books, you will know that detection of the fraud scheme requires a multitude of strategies. You will first use specific identification to identify purchase orders and invoices; then internal control avoidance to identify changes and eventually data interpretation to select the sample.
The fraud auditor will need to determine the reason for the change in existing documentation. Most likely you will need to interview the budget owner about the changes.
The fraud auditor will also need to obtain independent evidence to support a conclusion of whether the change was foreseeable or whether the change was truly not foreseeable. If the change was foreseeable, you need to determine whether the budget owner was negligent or caused the change with intent to corrupt the bidding process.
As to overbilling, the fraud auditor should recreate all the vendors’ bids to determine if the lowest cost was selected based on the actual quantities versus the projected quantities. The following example illustrates the outcome of one our projects, we have simplified the analysis by only reflecting two vendors and three items. As you can see, the overbilling was significant. This analysis alone typically convinces management of the seriousness of the scheme.
At Fraud Auditing Inc. we have over 38 years of diversified experience. Contact us today if you need help building a comprehensive fraud audit program to detect complex fraud schemes.