Office of the Vermont State Auditor

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					              State of Vermont
         Office of the State Auditor
        Thomas M. Salmon CPA, State Auditor




Using Data Mining Techniques to Identify
     “Potential Improper Payments”
         Panel Participants

• Stephen Vantine , CIA – Audit Manager
• Jeff Kellar, CPA – Audit Supervisor
• Hugh Pritchard, CIA – Senior Auditor
  Background of the State Auditors
              Office
                              Mission
• The Vermont State Auditor's Office is a catalyst for assuring
  accountability in state government through reliable and accurate
  financial reporting and by promoting economy, efficiency and
  effectiveness in government. The office does this by conducting
  audits and reviews, and by providing consultations, technical
  assistance and training.

• Constitutional office, the State Auditor is elected every two years.

• Staff size = 13, 9 Audit Staff

• Performance audits, statutory audits, counties, municipalities and
  school districts.
State of Vermont
     Six Agencies
  • 75 Departments
• ~ 8,000 employees
• ~290,000 Vendors
 • ~623,000 citizens
      State of Vermont Financial
     Management System (VISION)

•   Oracle/PeopleSoft product (v. 8.8)
•   Financials and Human Capital Management
•   Other interfaced IT systems
•   Decentralized invoice and voucher processing.
•   Decentralized operational accounting.
•   Centralized financial reporting
       Data Mining Technology
     IDEA Data Analysis Software (v.7.3)

• Key Features: It allows you to import, join, analyze,
  sample and extract data and manage large volumes of
  data (our audit was approx. 1,022,000 vouchers).
• Maintains the integrity of the original source data.
• Creates automatic audit trail/activity log of actions
  performed on the source data.
“Potential Improper Payments
            Audit”
                        Objectives

•     To use data mining techniques to identify
    potential improper payments made by the State
    from January 1, 2007 to December 31, 2008.

•    To review the internal controls related to
    payments.
    (The audit was performed in accordance with GAGAS)
      Internal Controls Reviewed

• IT General Controls

• Control Environment

• Control Activities

• Interfaces
        Testing and Algorithms
                 Duplicate Invoices

• Full matches: pairs of vouchers where invoice number
  and date, vendor ID and $ amount all match precisely.

• Partial matches: pairs of vouchers where three of the
  above four fields match, and the fourth differs.

• Fuzzy matches: pairs of vouchers where the invoice
  number and vendor ID match precisely, and the date or
  $ amount differ slightly.

• Vendor ID transposition test.
         Testing and Algorithms
               (continued)
    Unusual matches with other data sets
• Matching Addresses – vendor’s address matches an
  employee’s address.

• Matching Bank Accounts – vendor’s bank account
  matches an employee’s bank account.

• A match of the vendor name, and system users who
  entered or approved the voucher.
          Testing and Algorithms
                (continued)
                  Unusual Patterns

Vendor Vouchers with unusual standard deviations greater
          than other invoices from that vendor.

 All of these algorithms identified actual improper payments
         except for matching bank accounts and matching
                            addresses.
  Internal Control Observations
• Understanding system user privileges is critical.

• In a decentralized environment, departments
  adopt individual practices which can create lack
  of uniformity.

• Duplicate payments created by not paying from
  original invoices.
   Internal Control Observations -
             Continued

• Intentional/unintentional circumvention of
  system duplicate payment detection controls.
• Master vendor file management process.
             Data Mining Tips
• The design of your audit objectives is critical.
  (ex: minimum dollar thresholds).
• Ask for the “data dictionary” (if available).
• Understand Geek speak. Find a resource that
  understands the data structures and data
  elements and the operational business
  processes.
            Data Mining Tips
• Use a “programming mindset” during your
  analysis.
• Use precise algorithms to be selective and
  narrow the data population.
• Use desk reviews of the analysis results to
  increase efficiency of the audit (numerous non-
  standard accounting entries gave rise to “false
  positives”).
            Data Mining Tips
• The audit’s own database file management is
  essential - file size growth can be problematic
  for storage and manipulation of data.
• Managerial review of work papers requires the
  reviewer to have a working knowledge of the
  data mining software.
Discussion and questions?
              Contact Information
       Office of the Vermont State Auditor
                       www.auditor.vermont.gov
                         Tel (802)-828-2281

Thomas M. Salmon
               Tel. (802) 828-2281
               e-mail: tom.salmon@state.vt.us .
Stephen Vantine
               Tel. (802) 828-2284
               e-mail: steve.vantine@state.vt.us
Jeff Kellar
               Tel. (802) 828-2122
               e-mail: jeffrey.kellar@state.vt.us
Hugh Pritchard
               Tel. (802) 828-4619
               e-mail: hugh.pritchard@state.vt.us