Fighting fraud by the numbers

Digital analysis primer


By BY LINDA M. LEINICKE, PH.D., CPA; JOYCE A. OSTROSKY, PH.D., CPA, CMA; AND W. MAX REXROAD, PH.D., CPA
Many new fraud examiners know that they need to use digital analysis in their cases but they also need some guidance through the maze. Here's some practical advice from your experienced colleagues.

Unique Fashions Inc. owns and operates retail clothing stores for women nationwide. The company builds and maintains all its retail stores. Each store manager is authorized to spend up to $5,000 per quarter on store maintenance. These expenditures include things such as repairing broken store windows, and fixing air conditioning and heating problems, roofing problems, plumbing problems, etc. The maintenance expenditures are captured store by store.1 

Two years ago, to establish baseline data, the internal auditors of Unique Fashions decided to analyze the maintenance expenditures using digital analysis. During their analysis they had determined the pattern of the typical distribution for maintenance expenditures per quarter per store: 30 percent of the expenditures range from $1 to $1,250; 50 percent from $1,251 to $2,500; 15 percent from $2,501 to $3,750; and 5 percent from $3,751 to $5,000. This year's analysis of maintenance expenditures revealed that store No. 156 had 47 percent of its maintenance expenditures in the $1 to $1,250 range. This store was scheduled for an internal audit visit.

Suspecting fraud, the internal auditors included a CFE on their audit team. The CFE's investigation revealed that Miss Jones, the store manager, was participating in a kickback scheme with her brother-in-law who owns a heating and air conditioning company. Without the digital analysis of the maintenance expenditures account, this fraud possibly would have never come to light.


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