How Descriptive, Diagnostic, Predictive and Prescriptive Analytics Can Be Used To Stop Fraud in Its Tracks

Fraud analytics is a somewhat abstract concept to explain, but becomes easier once you break it down into its core concepts – analytics, the analysis of data or statistics, and fraud – wrongful deception intended to result in financial gain.

Taken together, fraud analytics can be described as the analysis of data to detect financial deception. These procedures can be as simple as scanning a disbursements ledger for proper approval, to building a neural network predictive model to detect fraudulent credit card activity. Fraud analytics has evolved over the years into a very complex field that consists of combining business knowledge with statistics and computer science to better identify and understand the actions and intentions of fraudsters, and even to stop fraudulent activity before it occurs.

Descriptive and Diagnostic Fraud Analytics

Two of the main types of analytics often performed are:

  • descriptive analytics – answering the “What is happening?” question.
  • diagnostic analytics – answering the “Why did something happen?” question.

In practice, descriptive analytics often involve the use of business intelligence tools to summarize and display data to business leaders in the form of dashboards or other types of reports. For example, metrics related to employee spending, such as the number of expenditures at different spending levels, could be gathered in a dashboard for the examinations of trends. Once this is done, trends are often identified, such as a higher proportion of expenditures at a given threshold.

Diagnostic analytics would then determine why this trend is happening. For example, the higher proportion could be a result of receipts being required for all purchases over a given amount.  

Predictive and Prescriptive Fraud Analytics

Once the “What is happening?” and “Why is it happening?” questions have been answered, it is often useful to take fraud analytics a step further and answer the questions of “What’s likely to happen?” and “What to do next?” These questions relate to predictive and prescriptive analytics, respectively.

A predictive fraud analytic related to the previously described employee expenditure scenario would be to determine the likelihood of an employee to commit fraud based on past fraudulent events. This would take into account characteristics of both the expenditure, such as those just under the amount requiring a receipt, and the employee, such as their role, duties, or even yearly salary, to come up with a “profile” of employees and expenditures most likely to indicate that a fraudulent event will occur.

Prescriptive analytics can then answer the question of what to do next. For example, if it is determined that employees under a given level of salary are more likely to commit fraud than those with higher salaries, a higher level of review could be required for these employees’ expenses. Prescriptive analytics would also evaluate the cost and benefit of the solution to make sure that the organization isn’t spending more trying to catch the fraud than it would be losing from the potential fraud.

Overall, fraud analytics is a fascinating domain that can bring enormous value to organizations. With a proper plan and infrastructure in place, not only can organizations identify fraud that is happening within their organization, they can proactively implement policies that would stop fraud before if even starts.

If you have any questions regarding potential fraud schemes, internal controls, or the use of data analytics to detect fraud at your organization, please contact Andrew Trettel, CPA, CFE, CVA at 412-697-5436 or Brian Webster, CPA/ABV/CFF, CVA, CFE, CMA at 412-697-5307 of the Business Advisory group at Schneider Downs.

This article is part of a series supporting International Fraud Awareness Week 2020, additional entries are linked below for reference:

 

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2021 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
The Impact of Environmental, Social and Governance Factors on Business Valuation
Projections: The Dirty Little Secret of Business Valuation
Valuing a Business: Why Your Deli (Likely) Isn’t Worth $100 Million
M&A Activity on the Rise in 2021
Earnouts in Today’s Environment
SBA Raises Disaster Loan Limits
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.

×