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Fraud Data Analytics Plan for Shell Companies — Scenario
Due to excessive employee turnover at the My Best Outfit.com, an online clothing company, and difficulty hiring personnel, an employee who processes invoices was also given access to the supplier creation system to cover during the employee shortage. The employee worked for the company for several years without any problems and was perceived to be a loyal employee by company management. The employee handled the extra job responsibilities for nearly a year, putting in extra hours without extra pay. When the company hired a regular staff member to handle supplier creation, the authority given to the invoice employee was not withdrawn allowing the employee to continue accessing the system even though the employee no longer handled those responsibilities.
While handling the supplier creation, the employee recognizes a weakness in the internal controls for invoice approval. The financial officer, who approves all invoices for payment, only examines the largest payment in detail. The financial officer then signs the remaining invoices without scrutinizing any other bills or payments.
The employee creates a fictitious company and enters the company as a packaging supplier in the system. The employee submits false invoices for payment. The employee is restricted only by the amount of regular payments made by the company.
To avoid detection, the employee only submits invoices for amounts less than the authorized limits. The financial officer had never questioned the invoices, which are always paid. The payments are always authorized and sent to his bank account within a few days of submission. The employee continues to submit similar invoices on a regular basis.
The activity is uncovered during a routine supplier review when packaging costs are examined. It is revealed that over nine months, tens of thousands of dollars have been paid to a company that cannot be verified or associated with any legitimate suppliers. The company CEO called for a complete review of company data and records to identify the fraudster, determine how long the fraud has been perpetrated, and ascertain the amount of loss to the company.
Part I. Fraud Data Analytics Plan, Memorandum
For this Portfolio Project, you have been hired as a fraud examiner by a company CEO to analyze a fraud problem (explained in the scenario above) that came to her attention. The Sales Director is suspected of making these questionable charges employees, but the CEO wants to know if any other employees are involved in the fraud scheme. The CEO also wants to know the amount the company has been defrauded. You have been asked to use fraud data analytics to examine the company’s data, records, and other information.
Based on the facts of the scenario, prepare an 8-10-page memorandum (which will be drafted in your Portfolio Milestones in Weeks 4 and 6) detailing the fraud data analytics plan you will propose addressing the following elements:
- Describe the fraud scheme in the scenario in detail, as one of the three (3) fraud categories: financial reporting, asset misappropriation, or corruption.
- Evaluate reasons for using data analysis to detect fraud.
- Evaluate the red flags identified in the fraud scheme.
- Apply the fraud circle to develop a fraud scenario with cleansed data.
- Build a data profile to identify a potential shell company.
- Identify who, if anyone, will be interviewed and what questions should be asked.
- Explain how Pattern Recognition and Frequency Analysis will help to identify the potential fraud.
- Apply one of the following: the Fraud Triangle, Fraud Diamond, the Fraud Pentagon, the Fraud Scale Models, or the Triangle of Fraud Action in explaining fraud motivation for the perpetrators.
- Evaluate characteristics and components of data to assess its completeness, and cleanse the data for a sample selection to analyze.
- Assess the sophistication of the concealment strategies on which to base the fraud data analytics plan.
- Develop the fraud scenarios that will be used to define the fraud data analytics plan.
- Recommend the internal controls and policies the company should enact to prevent future frauds of this type.
- The narrative should be 8-10 pages in length, not including the title and reference pages.
- Organize the memorandum by sections that correspond to each of the required components listed above.