Fraud and Business Analytics

Transcription

1 Study Unit 6 Fraud and Business Analytics ANL 309 Business Analytics Applications

2 Introduction Fraud Different types of fraud Two common types of customer fraud: mortgage fraud and credit card fraud Why fraud occurs The role of business analytics in fraud detection

3 Fraud as Cost Companies incur costs to produce and sell their goods and services. The costs may comprise of labour, advertising, rental, raw materials, taxes, researches and developments, and fraud. The costs of fraud, unlike the other costs, are hidden even though it is eventually reflected in the bottom line of companies.

4 What is Fraud? Fraud encompasses any crime that involves an intentional act of deception, the concealment of that act and the derivation of benefits from that act.

5 Four Elements in Fraud From a legal perspective (Wells, 2005), under the common law, the following four elements must be present for a fraud to exist : 1. A material false statement. 2. Knowledge that the statement was false when it was uttered. 3. Reliance on the false statement by the victim. 4. Damages resulting from the victim s reliance on the false statement.

6 Types of Fraud 1 Albrecht et al (2006) identified the following types of fraud: 1. Employee Embezzlement 2. Management Fraud 3. Investment Scam 4. Vendor Fraud 5. Customer Fraud

7 Employee Embezzlement Albrecht et al (2006) identified types of fraud: 1. Employee Embezzlement 2. Management Fraud 3. Investment Scam 4. Vendor Fraud 5. Customer Fraud Employees steal directly or indirectly from their employers, resulting in a violation of the fiduciary relationship. A fiduciary duty requires a fiduciary to act in the best interests of the person or company whom he or she represents. Examples: embezzlement of assets, bib bribes, kickbacks. kb k

8 Management Fraud Albrecht et al (2006) identified types of fraud: 1. Employee Embezzlement 2. Management Fraud 3. Investment Scam Top management provides misrepresentation, usually in financial information. Example: Enron 4. Vendor Fraud 5. Customer Fraud

9 Investment Scams Albrecht et al (2006) identified types of fraud: 1. Employee Embezzlement 2. Management Fraud 3. Investment Scam Individual or companies that trick 4. Vendor Fraud their investors into parting with their money for fraudulent investment. 5. Customer Fraud

10 Vendor Fraud Albrecht et al (2006) identified types of fraud: 1. Employee Embezzlement 2. Management Fraud 3. Investment Scam 4. Vendor Fraud 5. Customer Fraud Vendor overcharges for goods or services or did not ship the goods or services upon receipt of payment. Employees of the purchasing companies may receive kickbacks.

11 Customer Fraud Albrecht et al (2006) identified types of fraud: 1. Employee Embezzlement 2. Management Fraud 3. Investment Scam 4. Vendor Fraud 5. Customer Fraud Customers deceive companies into giving them something they should not have or charging less than they should.

12 Types of Fraud 2 The Association of Certified Fraud Examiners (ACFE) categories: 1. Corruption Includes conflicts of interest, bribery, illegal gratuities and economic extortion. 2. Asset Misappropriation Includes fraudulent disbursement and skimming i of cash and misuse of inventory and all other assets. 3. Fraudulent Statements Includes improper financial and nonfinancial disclosures and valuations.

13 Mortgage Fraud Mortgage fraud can be subdivided into two broad categories: Fraud for Property Fraud for Profit

14 Credit Card Fraud Triangulation Skimming Bust-out Identity Theft Site Cloning

15 Why Does Fraud Occur? Controls are weak and/or the individual is in a position of trust. Rationalisation that fraud is not a crime. Huge monetary gains. Failure to detect the initial fraudulent activity. Consequently, detecting and deterring fraud is very important.

16 Fraud Detection Fraud Examination The process of detecting and preventing fraud. Includes obtaining documentary evidence, interviewing witnesses and potential suspects, writing investigative reports, and testifying to findings. All these involve heavy investments in manpower, time and money, and may not be practical in all cases.

17 Fraud Detection & Business Analytics Business analytical methods can be very useful in fraud detection. By searching for patterns in large datasets, these methods can - identify and flag fraud suspect claims early, - increase the accuracy for suspected fraud detection, ti and - improve productivity of the fraud detection unit by referring only highly to qualified cases.