Using Analytics to Detect Possible Fraud: Tools and Techniques

"I have had the pleasure of working with Pam Mantone over the past ten years, not only in the areas of fraud prevention and detection, but also in the area of litigation support involving significant fraud cases. Pam is a tenacious fraud examiner who has made a commitment to advance her skills to the highest level attainable in the profession. This exceptional book is an example of her dedication to the detection of fraud using advanced analytical techniques. In my opinion, her book should be required reading and an essential part of the technical library of any devoted fraud examiner." —Mike Costello, CPA/CFE, Practice Leader, Litigation Support, Decosimo Advisory Services Proven tools and techniques for effective forensic accounting Enabling you to conduct effective and efficient internal investigations, Using Analytics to Detect Possible Fraud clearly explains the investigative forensic process without unnecessary jargon or mathematical analysis. Certified Fraud Examiner Pamela Mantone provides an abundance of proven techniques gleaned from her broad experience, covering diverse areas of knowledge and proficiency. Featuring case studies of four companies, each undergoing distinct fraud investigations, Using Analytics to Detect Possible Fraud comprehensively looks at: The basics everyone should know Cash flows and cash flow statements The Beneish M-Score Model Accruals Analysis techniques using historical financial statements Benford's Law Get a solid introduction to forensic accounting. Using Analytics to Detect Possible Fraud prepares you for the forensic computer investigative process, revealing what it takes to uncover possible fraud, from beginning to end.

Preface xi Acknowledgments xv Chapter 1: Overview of the Companies 1 The Four Companies 2 Company 1 2 Company 2 5 Company 3 8 Company 4 10 Summary 16 Chapter 2: The “Norm” and the “Forensic” Preliminary Analytics: Basics Everyone Should Know 19 Liquidity Ratios 20 Working Capital 21 Working Capital Index 21 Working Capital Turnover 22 Current Ratio 22 Case Studies: Liquidity Ratios 22 Profitability Ratios 25 Gross Profit 26 Gross Profit Margin 26 Stock Sales 26 Return on Equity 27 Case Studies: Profitability Ratios 27 Company 1 31 Horizontal Analysis 36 Company 1 36 Company 2 43 Company 3 50 Company 4 61 Vertical Analysis 66 Company 1 66 Company 2 70 Company 3 73 Company 4 79 Summary 79 Chapter 3: The Importance of Cash Flows and Cash Flow Statements 83 Cash Flows and Net Income 85 Company 1 87 Company 2 89 Company 3 92 Company 4 97 Other Cash Flow Techniques 100 Company 1 101 Company 2 104 Company 3 107 Company 4 114 Summary 117 Chapter 4: The Beneish M–Score Model 119 Company 1 124 Company 2 133 Company 3 143 Indices of the Primary Government 145 Indices of the Governmental Funds 151 Company 4 158 Summary 166 Notes 170 Chapter 5: The Accruals 171 Dechow–Dichev Accrual Quality 173 The Four Companies: Dechow–Dichev Model 175 Sloan’s Accruals 184 The Four Companies: Sloan’s Model 185 Jones Nondiscretionary Accruals 191 The Four Companies: Jones Model 192 Summary 196 Notes 198 Chapter 6: Analysis Techniques Using Historical Financial Statements and Other Company Information 199 The Piotroski F–Score Model 200 Company 1 203 Company 2 205 Company 3 207 Company 4 212 Lev–Thiagarajan’s 12 Signals 215 Company 1 220 Company 2 222 Company 3 225 Company 4 230 Summary 233 Notes 235 Chapter 7: Benford′s Law, and Yes—Even Statistics 237 Benford’s Law 239 Company 1 243 Company 2 249 Company 3 255 Company 4 267 Simple Statistics 272 Company 1 277 Company 2 281 Company 3 284 Company 4 289 Summary 290 Note 292 Chapter 8: Grading the Four Companies 293 Company 1 294 Company 2 302 Company 3 310 Company 4 320 Summary 326 Bibliography 329 About the Author 331 Index 333

PAMELA S. MANTONE, CPA, CFF, CITP, CGMA, CFE, FCPA, is a Senior Assurance Manager at Joseph Decosimo & Company, PLLC, practicing in the areas of audit and attestation with a focus on forensic accounting, fraud examination and audits of financial institutions, nonprofit organizations, publicly traded companies and governments. She provides forensic accounting services, with an emphasis on embezzlement and fraudulent financial information for multiple organizations, as well as consulting services regarding the implementation of fraud prevention and fraud protection internal control systems.