Overview/Narrative

Between July 1, 2002 and December 31, 2005, Wake County School employees in the school transportation department and Barnes Motor & Parts Co., based in Wilson, NC, submitted at least $3.8 million in fraudulent invoices for school bus and automotive parts. Much of the money was used by the employees to buy personal items such as automobiles, campers, golf carts and plasma-screen televisions. This despite a bid limit of just $2,500. Wake County schools had one internal auditor. The story received wide press. An audit report explaining many of the details is available on the School Board's web page.

Once the The School district fired the employees and an investigation was performed, $4.8 million was recovered from Barnes and the former employees. There were numerous red flags that were not noticed:

• payments to Barnes Motor & Parts increased 342% from 2002 to 2003 (an increase in excess of
  $3,700,000).
• 2/3 of the invoices from Barnes Motor & Parts were under the $2,500 bid limit, and did not have a corresponding purchase order
  
• for two years, over 99.95% of invoices were under $2,500
  
• on 24 occasions, there were 50 or more invoices from Barnes Motor & Parts with the same invoice date, and a majority of these invoices had consecutive invoice numbers
  
• On June 10, 2003, as the fiscal year end approached, Barnes Motor & Parts submitted 466 invoices totaling $909,266.

It is essential to detect when instances of circumvention of procurement controls may be happening. Basic histogram charts and data analysis can readily disclose many anomalies.

Audit Objective

The objective is to determine compliance with controls over purchases.

Note: there is a detail handout available as part of the course, "Managing the Business Risk of Fraud" which explains many of the steps below. The section of the handout referred to is section 10.

Audit Procedures / Audit Program

1. Obtain test invoice data in electronic format, note data elements. (Zip file 29 MB)
   
2. (Note that data does not need to be pre-sorted).
   
3. Determine which supplier is the most different from all other suppliers using Benford's Law or other criteria.
   
4. Examine the underlying data pertaining to the three most different suppliers. Examples include data stratification, Benford's Law, day of week analysis. Further details are available in the handout.
   
5. Write a report explaining your observations, and provide conclusions and recommendations.

 

Description of Analytical Procedures Performed

Note that it is not necessary to "pre-sort" the data.

Specify the Excel work book PO.xls as input.

Variable to be tested will be Vendor Number and Invoice Amount

The report below shows the vendor with the most unusual procurement pattern, as measured using Benford's Law.

Note that for vendor 105436 (vendor with the largest Chi Square value), the Chi Square easily exceeds any of the top three values.

 

Screen Shots of Analysis

We can now run a trend line plot for invoice amounts for vendor 105436:

Now run a trend line analysis for vendor 105436, using quarterly invoice totals, and specify a confidence limit of 95%:

Screen Shots of Output

Notice the data points around the end of the fiscal year? Each is well outside the confidence interval, yet within the prediction interval.

Note: A complete User Guide is available which explains these and other aspects of the software.