FCPA Compliance and Ethics Blog

February 3, 2015

Five Tips for Advancing with Audit Analytics-Part II

Filed under: Big Data,Data Analytics,Joe Oringel,Visual Risk IQ — tfoxlaw @ 12:01 am

Oringel - new picEd. Note-Joe Oringel, Principal at Visual Risk IQ recently wrote a series of blog posts on advancing your business through the use of data analytics and audit. I asked Joe if I could repost his articles, which he graciously allowed me to do. So today I begin a day 3-day series of blog posts which reprint his post. Today are Tips 3-4.

 Tip 3- Understanding Your Data

Tip 3 for advancing with audit and compliance analytics is to “Understand Your Data, and Explore it Fully Before Developing Exception Queries.” One common mistake that we see audit and compliance professionals make with data analytics is that they sometimes dive right into searching for transaction exceptions before exploring their data fully. This limits the effectiveness of their analysis, because they are searching for something specific and can overlook other conditions or anomalies in their data. If you’ve not seen the selective attention (aka Gorilla and Basketball) videos from Daniel Simons, here’s a fun link.

Selective attention on exception queries seems to happen due to the strengths of traditional analytics tools like Microsoft Excel and general purpose tools like CaseWare IDEA or ACL. It is less common with Visual Reporting tools like Tableau and Qlikview, in part because these tools are designed to specifically support data exploration and interaction with click and drill-through capabilities. Visual Reporting capabilities are very effective for data exploration, and some rudimentary visual capabilities can be found in Excel, IDEA, and ACL.

During data analytics brainstorming, we categorize analytics queries as Metric Queries, Outlier Queries, and Exception Queries. When prioritizing queries to be built for client assignments, we make sure that there some of each type of query, so that sufficient data exploration takes place before we jump into exception queries or begin researching exceptions.

Metric queries are those analytics such as “Top 10 Vendors by Vendor Spend” or “Top 10 Vendors by Number of Transactions”, or “Top 10 Dates of the Year for Requisitions (or Purchase Orders).” Simply summarizing number and value of transactions by different dimensions (day of week, week of quarter, or by UserID) can identify anomalies that should be questioned further. On a recent Payroll Wage and Hour project, we found unusual patterns of when people punched in and out much more frequently on some minutes (e.g. 7 or 23 minutes past the hour, vs. 8 or 22 minutes past the hour). This condition called for further inquiry and analysis about whether time rounding was fair and equitable for certain types of workers. This condition is in fact a major compliance risk and should be considered for any employers with a significant number of hourly worker. See Corporate Counsel article for more information.

Outlier queries are comparative analytics like “Largest Invoice to Average Invoice, by Vendor,” “Most Expensive Airfare by Distance,” or “Most Expensive Travel / Entertainment Event per Person vs. Average Event per Person.” These outlier queries are also essential, in that they help identify patterns or relationships that should be investigated further. Digital analysis such as Benford’s Law is a well-known audit example of an Outlier query, but there are many more techniques that can yield insight beyond only Benford’s Law.

Example of exception queries are more traditional Analytics queries such as these listed below:

  • List if two (or more) invoices have been paid for the same amount to the same vendor
  • List any purchase orders created after their corresponding invoice
  • List any Vendors who share a Tax ID Number, Address, or Phone Number with an Employee
  • List any Vendors who have had transactions posted after being Terminated or made Inactive

In short, we recommend spending at least an hour and as much as a day or more exploring and analyzing your data, before beginning any Exception Queries. A data exploration checklist follows – any additions or other suggestions to this list are welcome.

  • Sort transactions from oldest to newest and from newest to oldest. Any unusual dates or times? Any gaps in date or time stamps? Why?
  • Sort transactions from largest to smallest and smallest to largest. Any unusual negative values?
  • Stratify by various status codes, reason codes, or transaction types. Are all values consistently completed. Any unusual relationships? What do each of the codes and values represent?
  • Stratify by dollar value ranges. Do 20% of the transactions make up 80% of the value? Should they? The Pareto Principle says yes, but your business may vary.
  • Compute Relative Size Factor (largest to average and largest to second largest), and sort again. Do any of these RSF values cause you to want to drill into specifics? Consider whole numbers and large numbers. Why or why not?

What has been your most significant “aha” moment when exploring your data?

Tip 4 – Considering Outliers

Five tips…#4. Consider metric, outlier, and exception queries

For readers seeing this post as their first of the series, today is actually the fourth of a five-part blog that has been developed in response to Internal Auditor magazine’s lead article titled “The Year Ahead: 2015”. Because so many people make resolutions for the new year, we wanted to help audit and compliance professionals succeed with their resolutions. Especially because we believe there are more than a few whose resolutions include becoming more data-driven in their work through regular use with data analytics.

Yesterday we defined metric, outlier, and exception queries, and provided examples in the context of related potential audit projects around expenses such as Accounts Payable, Travel and Entertainment, or Payroll. To review, metric queries are simply lists of transactions that measure values against various dimensions or strata, such as rank or time series. Top 10 largest or simply transactions by day of week are examples of metric queries. These metric queries are powerful, and can become even more powerful when combined as part of outlier and exception analysis.

One recent Travel and Expense example from our client work was seeing a number of executive assistants in the “Top 10 Travel Spend reports.” Even before we looked at any exception report it became clear that some of the organization’s executives had their assistants complete and submit their personal expense reports, and then approved those reports themselves.

Outlier queries are those that compare value to other values like a mean or standard deviation. As an example, saying that today is twenty degrees colder than average or the coldest day of winter is more informative than saying that it will be sixteen degrees tomorrow than yesterday. Better still, listing the 10 coldest days together in relation to average and standard deviation is even more informative.

We recommend diving into exception queries only after metric and outlier queries have been prepared, explored and analyzed. It’s common for false positives to be averted through thoughtful review of metric and outlier queries.

How does this compare to your experiences?

Joe Oringel is a CPA and CIA with 25 years of experience in internal auditing, fraud detection and forensics. He has over ten years of Big 4 external audit, internal audit, and advisory experience, most recently with PricewaterhouseCoopers. His corporate experience includes information security, internal auditing, and risk and control of large ERP systems for companies in highly regulated industries, including Pharmaceuticals, Utilities, and Financial Services. Partner Kim Jones and Joe founded Visual Risk IQ in 2006 as an advisory firm focused solely on Data Analytics, Visual Reporting, and Continuous Auditing and Monitoring. He can be reached at joe.oringel@visualriskiq.com

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

© Joe Oringel 2015

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