The Power of Data Analytics in Identifying Workplace Fraud

By Darin Styles, CPA, CFE

Data monitoring is widely regarded as an effective tool for identifying trends and areas of improvement within a business. It also happens to be invaluable when it comes to detecting and preventing fraud. According the Association of Certified Fraud Examiners’ 2018 Report to the Nations, organizations that implement proactive data monitoring detect frauds 58% faster and experience losses that are 52% lower than those that don’t.

But for many businesses, the question becomes: Where do you start?

The short answer: there isn’t a standard process to follow. The data you monitor and analyze will depend on your organization’s data-monitoring capabilities, goals, and resources. Yes, you can easily dive down a very deep rabbit hole. But in my years of work as a certified fraud examiner, I’ve found that focusing on the following three types of data is a good place to start.

Your Books

There are a few red flags to look out for when reviewing your books. First, identify any transactions that occurred at an odd time of day or day of the week. If you’re a 9-to-5 business, an example of this might be a transaction that took place at midnight or on a holiday or weekend.

You’ll also want to look for relationships between accounts that don’t make sense. For example, a transaction involving “cost of goods sold” and “accounts receivable” could warrant scrutiny, as you’re typically not involving both of these accounts during a routine transaction. I also advise my clients to flag any transaction involving “equity” as suspicious. Unless you’re fundraising or making distributions, there’s usually no reason to adjust “equity” with a journal entry.

Your Vendor Lists

Conduct an annual or biannual review of your approved vendors list to check for duplicate, unrecognized, misspelled, and inactive vendors. Regarding the latter: Seeing a vendor you haven’t worked with for 5 years or that you know to be out of business show up on your active vendor list should prompt a few questions. Comparing employee and vendor information is a good idea, too. (Sometimes employees will enter their home address or phone number when creating a fraudulent vendor account.) Consider running a vendor activity report to help pinpoint these kinds of discrepancies.

Your Numbers (Benford’s Law Analysis)

This is where things can get a little more complicated. Benford’s Law, generally speaking, says that there are specific relationships within a population of naturally occurring numbers. The numbers we’re talking about in this case are your transaction amounts. These won’t necessarily be in a set order or sequential amount, but there will be relationships between how often a leading digit appears and the range of amounts. Fraudulent amounts could affect the population of naturally occurring numbers. Using Benford’s Law analysis, it’s possible to identify the numbers that don’t “fit” within the population, giving you the opportunity to investigate further.

Take Action, if Necessary

The important thing to remember about data analytics is that a red flag isn’t always proof of fraud; it’s simply a sign that you should take a closer look. And if you discover an instance of fraud, your data could serve as valuable evidence if you were to pursue legal action. Staying proactive and consistent with your data monitoring efforts could help to prevent fraud from impacting your business.

If you have questions about data analytics and other fraud prevention tactics, please contact us today.