hi and welcome back to uncover fraud.com my name is david malumad and i am a forensic accountant fraud investigation expert with over 20 years of experience today i'm going to be talking to you about how to find financial statement fraud now before i begin and before i flip over to excel i've got to tell you that finding financial statement fraud is really going into the journal entries going into the registers and looking for anomalies things that kind of lay outside of the norm so that's really what we're going to be looking for something to keep in mind is as soon as you do find something that sits out of the norm you really want to start diving in peeling back the layers and seeing the detail behind it it's difficult to identify these outliers but once you do identify them it really is the underlying support that is going to give you the evidence that you need to demonstrate that there is financial statement fraud so let's begin i'm going to flip over to excel in front of you you've got your vendor master list your vendor master list has your vendor id the name address city zip code phone number credit limits terms and really what we want to start with is we want to first alphabetize the name of the vendors and i'm just giving you a snapshot here of a vendor list a lot of the time the vendor list is going to be significantly bigger than this but when you look over here at the ones that i've got highlighted you've got amazon and am zn straight away when you see amazon and amzn you know that amazon is just missing its vowels its two vowels the a and the o there is similarities here and that straight away is a red flag of fraud why because potentially a second vendor has been set up and they're using the short form to make you believe that it's amazon when really it's not amazon it could be a company that they started themselves a ghost company etc when you look a bit further you see a po box a po box always is alarming because it's a post office box which business do you know that works out of a post office probably none so what you quickly want to do is when you do addresses you're looking for po boxes and that's a red flag and also what you can do is use google satellite to actually type in the address and make sure that the address that you're typing in is in the residential area if it is a residential area that's red flags again why are we seeing somebody's home we should be seeing a business area downtown and the suburbs you know wherever it is but not um not necessarily a home address the next thing that we're going to do is i'm going to go a bit lower down and i'm going to see over here i've got js okay so i see js i can just highlight that and i also have jamison supply and what you see here is you see the js and you see that it could be a short form of jameson supply but in this example you're actually seeing even more you're seeing that there's missing information so the address is missing you're seeing that the zip code has just sevens which is peculiar especially because all the other zip codes start with three and they're only sevens the phone number is only sevens again and there are terms and there's a credit limit so straight away that js is a red flag and we have to peel back all the payments to js to find out who they are and how they're being paid how who they're being mailed to are they being delivered by hand you know what is the problem there the next thing we want to do is we want to go over to the accounts payable register the accounts payable register lets us see all payments that we've made to suppliers and we're going to start looking at a few things here the first thing that we're going to do is we're going to sort by supplier a to z and then we're going to sort by invoice number as well so now when we sort by invoice number we're going to go over here to an empty column and we're going to do equals and we're going to do this invoice number minus the previous invoice number and i'm going to show you why to make a code down you just go to the bottom right side in excel double click and now what we're looking for is 219s 122s you don't really have to worry about those it's when we start to see low numbers that we start to get a little bit concerned and i'll show you why so i'm going to just highlight this and you can see those are ones and now the ones when we look at them we see that they're all jack sherman and we can see from looking at these we can see that it goes one two three one five one six one seven one eight now the question that you have straight away is why is there consecutive invoices there could be consecutive invoices because jack sherman doesn't have any other clients it could be that the work was done closely but when we look you can actually see that one of them is from june 2020 and the other one is from april 2021 so that straight away is a red flag why because first of all those invoice numbers appear to be out of sequence they're going down and next they seem to be split so when we go back to jack sherman we look at jack sherman we can highlight it and now i see that jack sherman has a credit limit of 175. so i'm going to go back to my accounts payable register and something that i see is the totals the totals are all more than 175. so something has happened here somehow there's been an override and the question is why has there been an override and again we've got to peel back the layers and see that especially we want to know why are we paying jack sherman once a year is it that it's cumulative is it that the terms have changed you know what is it that we're seeing so let's just take that off now what we want to do is we want to do again we want to go we want to sort it by our supplier and let's look at the invalid states and when i look at the invoice dates something that's interesting here is that let me highlight it again for you in yellow is that i see three invoice e3 invoices on the same date now we already saw that jack sherman had a limit a credit limit of 175 so already it's peculiar but the next thing that's peculiar to me is that there's three invoices on the same day why does that happen at times at times that happens because you have somebody manipulating the invoices or the the supplier that they're using how does that happen potentially there's a limit in terms of how you choose your suppliers let's say it's a hundred thousand dollars if you split that invoice into thirty three thousand three times you're actually coming in under the limit threshold allowing you to choose your supplier or allowing accounts payable or somebody in purchasing to choose their supplier and there may be kickbacks for direct sole sourcing that the individual is getting but you don't know until you start putting together that look i see three invoices they're all on the same date why is it being split is it just an efficiency issue potentially there is just an efficiency issue and it's nothing or potentially it's a red flag that you've got a problem next i i want to show you i want to go back to the vendor master list and what i'm looking for here is i'm looking for anywhere where there's potentially the same address with a different vendor name now let's have a look here i'm going to highlight these for you again and here you can see it's ib sports and ib and they both have the same address they both have the same address but they've got different credit limits so what has happened are we looking at the same business is there something that's peculiar here is iv potentially a ghost company again but you have to look into it you have to see where those checks going where are those wires going which accounts are they going to and you start looking into it and you really develop the story you can see you know by looking at a cancel check potentially you want to look at the back of the check and see which bank account numbers they're going into is it going into different bank accounts for ib sports as it is for ib these are the things that are going to identify the red flags and potentially the fraudulent issues next i want to go back to the accounts payable register and on the accounts payable register i want to look at my suppliers and i want to have a quick look at the invoice numbers and when i look at the invoice numbers i'm looking for inconsistencies you know if i look over here at recycling co i can see that there's six digits but when i look at the recycling code above that i see that there's only five digits and that straight away is a red flag to me why are there different you know it should be a conventional invoice number what's wrong with the one two three four one let's go down a bit lower and now i see saint urbain and when i look at saint urbain i'll highlight those for you in yellow i see that the that they all have five digits except for the last invoice the last invoice has a zq at the end and that could just be a data entry error or potentially you're looking at something else that outlies you know you've got to peel it back you've got to take a look at the invoice you want to see that the invoices are consistent with the previous invoices potentially there is a fictitious invoice and somebody's just been careless or hasn't seen things properly or as i said it could be a data entry error so now in the import now we're moving over to the employee master list at the employee master list the first thing i'm going to do is i'm going to do a vlookup so i do equals vlook up open bracket and i'm going to look for this address and i'm going to go back to my vendor master list i'm going to say if the address is the same comma in the first column bring it to me or give me a false now let's see what happens okay i got an n a there but now what i see is i see 342 wrigley road and abraham bamus has the same address 342 wrigley road has ib sports and ib so that starts to give me a question why is a supplier a vendor of mine also an employee of mine what is the crossover potentially it's a contractor who invoices and also is an employee that could be possible could be a a contractor that became a full-time employee or it could be that you've got a different issue that needs to be dealt with in terms of why is an employee paying himself as a vendor when really it's the same address and that really is a red flag for you [Music] next i want to go back to the accounts payable register and here i want to look for any round numbers what i call nice numbers if the numbers are nice i've got a problem so let's take a look here in terms of nice numbers the first nice number that i see is and i'm going to highlight it for you is twenty five thousand dollars i see twenty five thousand dollars i see no tax being charged and i see the total amount being twenty five thousand now normally you know if you look at the one above that's 170 619 dollars and 23 cents that gives me a bit more comfort because those numbers aren't nice they're not round they're not you know they seem like what happens when when you buy something in business it's not a rounded off number the 25 000 though could indicate potentially somebody paying themselves and forgetting to tax it or forget or trying or using a round number or it could also be a deposit so it could be one or the other and you really got to take a look to see okay so here's a really good place for me to stop right now and hopefully you've been able to see from these examples of how you find outliers and you know the financial information that we're looking at right now is obviously sample data that i've put together for you it's not someone's actual data and when you start working with data you really want to be able to manipulate it so at times what you're going to have to do when you do get it into excel or that is kind of the tool that you use to work around you're going to have to normalize which means really get everything into the columns make sure everything looks the same before you start doing those tests so if you like this video which i hope you did and i hope it was helpful please don't forget to subscribe and like it below also with some feedback i'm happy to make this into a series so you can watch these videos and if you're looking for a financial statement fraud this is really the beginning in terms of how to find it and i'll walk you through step by step again my name is dave mohammed and i'm a forensic accountant fraud investigation expert to find out more about me and the services that we offer please visit uncoverfraud.com until next time i look forward to seeing you god bless you