Using Data Analytics to Detect Fraud

Transcription

1 Using Data Analytics to Detect Fraud Data Analysis Tests for Detecting Financial Statement Fraud 2018 Association of Certified Fraud Examiners, Inc.

2 Financial Statement Fraud Schemes The fraudster intentionally misstates or omits financial statement amounts or disclosures to deceive users of the financial statements Association of Certified Fraud Examiners, Inc. 2 of 27

3 Financial Statement Fraud Schemes Typically involve: Falsifying, altering, or manipulating financial records, supporting documents, or business transactions Recording fictitious transactions or transactions that lack economic substance Intentionally omitting or misrepresenting information about transactions or events Intentionally misapplying generally accepted accounting principles (GAAP) 2018 Association of Certified Fraud Examiners, Inc. 3 of 27

4 Financial Statement Fraud Schemes Overstatement of revenue Overstatement of assets Understatement of expenses Understatement of liabilities Improper disclosures 2018 Association of Certified Fraud Examiners, Inc. 4 of 27

5 Red Flags of Financial Statement Fraud Schemes Anomalies in profitability Anomalies in cash flows Anomalies in assets Anomalies in liabilities Anomalies in equity accounts Anomalies in relationships between financial statement items 2018 Association of Certified Fraud Examiners, Inc. 5 of 27

6 Red Flags of Financial Statement Fraud Schemes Anomalies in significant transactions Anomalies in journal entries Anomalies in account balances Anomalies in business structure or operations Changes in industry, regulatory environment, or other external risk factors 2018 Association of Certified Fraud Examiners, Inc. 6 of 27

7 Tests for Financial Statement Fraud Schemes Financial statement analyses identify changes, trends, and significant accounts on the financial statements. Types of financial statement analysis: Horizontal analysis Vertical analysis Ratio analysis 2018 Association of Certified Fraud Examiners, Inc. 7 of 27

8 Horizontal Analysis Analyzes percent change in individual financial statement items from one period to next Can be performed on companywide data or on segregated data (e.g., by department or location) Watch items that should move in tandem: Sales and warranty liability Sales and cost of goods sold Purchases and payables to cash paid to vendors 2018 Association of Certified Fraud Examiners, Inc. 8 of 27

9 Horizontal Analysis Balance Sheet 20X3 20X2 Change 20X1 Change Assets Current assets Cash and cash equivalents $27,491 $3, % $1, % Accounts receivables, net $33,054 $16, % $8, % Prepaid expenses and other current assets $2,198 $1, % $ % Deferred tax assets, net $716 Total current assets $63,459 $21, % $10, % Property and equipment, net $13,773 $6, % $2, % Long-term accounts receivables $2,700 Deposits and other assets $2,757 $2, % $ % Total assets $82,689 $30, % $13, % 2018 Association of Certified Fraud Examiners, Inc. 9 of 27

10 Horizontal Analysis Balance Sheet 20X3 20X2 Change 20X1 Change Liabilities and shareholders equity Current liabilities Accounts payable and accrued expenses $11,904 $9, % $2, % Accrued compensations and employee benefits $7,356 $3, % $1, % Deferred revenue $10,732 $8, % $5, % Line-of-credit $4, % $2, % Notes payable, current portion $ % $ % Dividend notes payable $5,000 Total current liabilities $34,992 $27, % $12, % Notes payable, long-term portion $2,428 $ % Deferred revenue $746 $1, % $ % Deferred tax liabilities, net $671 Total liabilities $36,409 $30, % $13, % Total shareholders equity (deficit) $46,280 ($427) % ($793) % Total liabilities and shareholders equity $82,689 $30, % $13, % 2018 Association of Certified Fraud Examiners, Inc. 10 of 27

11 Horizontal Analysis Income Statement 20X3 20X2 Change 20X1 Change Total revenues $106,430 $53, % $22, % Total cost of goods sold $19,781 $11, % $5, % Gross margin $86,649 $42, % $17, % Operating expenses Sales and marketing $53,408 $30, % $13, % Research and development $12,106 $5, % $2, % General and administrative $11,809 $6, % $3, % Total operating expenses $77,323 $42, % $19, % Income (loss) from operations $9,326 $ % ($2,290) (116.2)% Provision for income taxes ($3,442) Net income (loss) $6,178 $ % ($2,375) (105.1)% 2018 Association of Certified Fraud Examiners, Inc. 11 of 27

12 Vertical Analysis Analyzes the relationships among the items on an income statement, balance sheet, or statement of cash flows by expressing components as percentages Highlights which accounts are the biggest drivers of company performance 2018 Association of Certified Fraud Examiners, Inc. 12 of 27

13 Vertical Analysis Balance Sheet Assets Current assets 20X3 20X2 20X1 Cash and cash equivalents 33.25% 11.66% 12.97% Accounts receivables, net 39.97% 53.50% 65.17% Prepaid expenses and other current assets 2.66% 4.77% 3.04% Deferred tax assets, net 0.87% Total current assets 76.74% 69.94% 81.18% Property and equipment, net 16.66% 22.92% 16.89% Long-term accounts receivables 3.27% Deposits and other assets 3.33% 7.14% 1.93% Total assets % % % 2018 Association of Certified Fraud Examiners, Inc. 13 of 27

14 Vertical Analysis Balance Sheet 20X3 20X2 20X1 Liabilities and shareholders equity Current liabilities Accounts payable and accrued expenses 14.40% 32.05% 21.62% Accrued compensations and employee benefits 8.9% 12.08% 13.44% Deferred revenue 12.98% 27.74% 39.37% Line-of-credit 14.99% 21.21% Notes payable, current portion 2.99% 2.74% Dividend notes payable 6.05% Total current liabilities 42.32% 89.86% 98.38% Notes payable, long-term portion 8.08% 3.54% Deferred revenue 0.90% 3.48% 4.18% Deferred tax liabilities, net 0.81% Total liabilities 44.03% % % Total shareholders equity (deficit) 55.97% (1.42)% (6.10)% Total liabilities and shareholders equity % % % 2018 Association of Certified Fraud Examiners, Inc. 14 of 27

15 Vertical Analysis Income Statement 20X3 20X2 20X1 Revenues % % % Total cost of goods sold 18.59% 20.76% 23.26% Gross margin 81.41% 79.24% 76.74% Operating expenses Sales and marketing 50.18% 56.89% 57.75% Research and development 11.37% 9.43% 12.56% General and administrative 11.10% 12.23% 16.56% Total operating expenses 72.65% 78.55% 86.87% Income (loss) from operations 8.76% 0.69% (10.13)% Provision for income taxes (3.23)% Net income (loss) 5.80% 0.23% (10.51)% 2018 Association of Certified Fraud Examiners, Inc. 15 of 27

16 Ratio Analysis Means of measuring the relationship between two different financial statement amounts: Accounts receivable turnover Sales to total assets Related-party sales to total assets Working capital to total assets Leverage ratios Ratios involving nonfinancial data 2018 Association of Certified Fraud Examiners, Inc. 16 of 27

17 Other Tests for Financial Statement Fraud Schemes Tests to identify anomalies in: Journal entries Account balances 2018 Association of Certified Fraud Examiners, Inc. 17 of 27

18 Robert Gunning s Fog Index Analyzes notes to financial statements Measures readability of a sample of writing Uses index comparisons to identify significant changes in readability 2018 Association of Certified Fraud Examiners, Inc. 18 of 27

19 Gunning s Fog Index Compare the Fog Index score of a particular note in a particular period to that of a similar note: In a different period Of a similar company Compare the Fog Index score of all of the notes combined in a particular period to that of all of the notes combined: In a different period Of a similar company 2018 Association of Certified Fraud Examiners, Inc. 19 of 27