Chapter 6Fraud Data Analytics for Shell Companies

Boards of directors, stockholders, management, and the professional standards are expecting auditors to respond to risk of fraud in core business systems. Within a company's accounts payable file, shell companies are being used to steal millions of dollars from companies or the shell company is used to conceal bribe payments that violate anti‐bribery laws. The purpose of this chapter is to explain our methodology and experiences in detecting shell companies within the fraud audit.

In your customer database, internal employees have set up shell companies to sell to themselves at large discounts. We call this a front customer scheme. Internal employee then sells the goods to your customers at a markup. The internal employee then skims off the profit. In your vendor database, internal employees have created shell companies to misappropriate company funds or management has created a shell company to conceal the payment of bribes. In payroll, the internal employee has created the proverbial ghost employee.

The fraud scenario approach to uncovering fraud in core business systems recognizes that every secondary category of the fraud risk structure has one or more inherent fraud schemes. Every fraud scheme has two parts—an entity and a fraudulent action statement. This chapter will discuss fraud data analytics to search for the entity structure of the inherent scheme. In particular, this chapter will discuss fraud data analytics for locating ...

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