Fraud Diagnostics & Detection

A three-week CPA focused on advertising, promotion, marketing and logistics for a medium-sized American food company uncovered $24 million in false marketing support and ‘bill back’ claims that were rationalised by the Sales Manager with what became a career-terminating phrase: ‘We suspected that our salesmen, distributors and retailers were abusing the system but my view was that the money ended up somewhere in the channel in a way that must help sales’.
His Managing Director did not feel the same way, especially when he found that substantial sums were paid to retail store managers personally (and usually in cash) to put his company’s products in the most prominent display positions and in advertisements on local TV. This rarely happened. Recoveries were made and future claims reduced with no discernible impact on sales. The Managing Director reckoned that the CPA added $100 million to the company’s valuation on listing 18 months later.
Fraud involves an array of opponents including competitors, suppliers, customers, agents, advisers, employees and, increasingly, organised criminals and  skilled techno-nerds. They choose the victim, timing and tools. Some frauds occur day in-day out and erode profits and others are one time smash and grabs.

Losses from fraud and corruption – for a typical large private or public sector organisation – are estimated to be in the range of 5% to 10% of turnover and many involve regulatory breaches; thereby creating the double whammy of losing money and then being punished for the privilege! However, the more positive news is that criminals and corrupters do not have a limitless menu of opportunities and when they are exploited invariably leave clues (“outliers”) in accounting, statistical or other records, through perverted decisions, windfall profits or exceptional losses, unexplained personal wealth and in other ways.

In 1974, Mike Comer pioneered an automated methodology for detecting fraud –called Critical Point Auditing (CPA). Since then CPA has been refined and extended and is credited with uncovering losses in excess of £300 million, mainly when there were no prior suspicions.
CPA is a comprehensive- and mainly automated - process that uses all available legal and ethical techniques to uncover outliers of fraud and corruption. It consists of the three elements shown in Figure 15.

Figure 15 The Essentials of CPA

The success of CPA depends on the efficacy of the tests. Cobasco has invested thousands of man-hours in compiling an automated data base that currently includes over 1,000 tests, primarily to detect the symptoms of fraud and corruption.  Figure 16 summarises the components and illustrates that keying in the context or process to be tested, lists of the data elements required, specifications of the tests, report templates and interpretation guides are automatically produced.

Figure 16: The Unicorn Program
The fully relational data base means that keying in details of the context or process to be tested, automatically identifies the data elements required and the tests.

The output from a typical CPA is as follows:
  • Outliers indicative of fraud, corruption or other malpractice, worthy of investigation (10%)
  • Outliers indicating control weaknesses and justifying remedial action (20%)
  • Transactions confirmed as accurate and decisions as honest (65%)
  • Unresolved items (3%)
  • False positives where suspicions are aroused unjustifiably (2%)
The benefits of CPA in the corruption context are much greater than for fraud because, in addition to potential recoveries, controls are tested and validated, decisions confirmed, regulatory breaches prevented and adequate procedures demonstrated.

Tests demonstrate that procedures are effective…

You believe your organisation is not currently a victim of significant losses through fraud or corruption, we will carry out a full diagnostic check and let you have a comprehensive report including a benchmarked analysis of your codes of conduct, policies and procedures;

We uncover nothing significant, our work will be free of charge and we will make a £10,000 donation in your company's name to a children's charity of your choice. Otherwise our fee will be 40% of the proven losses. What do you think the typical reaction to the above “win-win” challenge is?
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