Question

Data analytics is a powerful tool in fraud detection and is often used to search for signs of fraud in the purchasing function. To learn more aout data analytics as a fraud detection tool is purchasing, visit the Fraud Magazine Web site (www.fraud-magazine.com) and search for the January 2013 article "Devil in the details: anti fraud data analytics."

a. The article discusses a purchasing fraud that occurred in a stage government agency. What was the nature of the internal controls over the purchasing function in the agency that provided the opportunity for fraud to occur? What were the incentives of the purchasing department to commit the fraud?

b. How can data analytics tools be used to detect fraud in the purchasing function?

c. Describe three analyses a fraud examiner could perform to detect fraud related to a particular vendor (e.g. calculate year-to-year percentage changes in total purchases from each vendor).

Answer 1

a. The nature of internal controls over the purchasing function in the agency that provided the opportunity for fraud to occur is as follows :

• vendor gave kickbacks to those employees in a well-funded department who authorized payments for supplies the vendor never delivered.
• as the end of the budget year approached, crooked employees approved hundreds of phony vendor invoices a day until the department's entire budget was consumed. The conspirators easily circumvented the agency's main control against over-billing schemes — that all purchases costing $2,500 or more had to be accompanied by a purchase order.
• payments to the co-conspirator vendor increased 342 percent in one year — growth far greater than in the department's payments to its other vendors.
• Incentives : employees were buying themselves expensive appliances and consumer electronic devices — even vehicles — and that a vendor who provided services to the agency was picking up the tab.

b. Data analytics tool can be used in following ways to detect fraud in purchasing function :

• drilling down into financial data to examine suspicious transactions.
• sort this financial data in order to identify patterns and establish relationships between them.

c. Three analysis can be:

• calculate year-to-year percentage changes in total purchases from each vendor.
• put a regular check on departments budget.
• put a check on the purchases which are nearly less to the purchases to avoid any scrutiny.