Are Customers Offered Appropriate Discounts? An Exploration Study of Using Clustering Techniques in Internal Auditing

• In Event: Auditing 3

Abstract

In the current marketplace with fierce competition, most firms concentrate on maintaining their market position and optimizing profitability. Among many forms of competitive advantage, customer base is one of the most critical. By identifying different types of customers, a firm may tailor its business processes to optimize profits. Therefore, one crucial mission of internal auditor is to examine whether current processes efficiently and effectively retain desirable customers and control losses from less desirable customers.
In this paper, we investigate an internal auditing issue that examines the appropriateness of the discount offering process relative to credit card customers at a major bank. An effective discount offering process should provide higher discounts to more favorable customers than less favorable customers. We employ clustering techniques in determining the types of customers, and identify seven clusters of customers. Based on customer types, we ultimately find that customers have not been consistently offered appropriate discounts.

Authors

• Jun Dai, Rutgers, The State University of New Jersey

• Paul Eric Byrnes, Rutgers, The State University of New Jersey, Newark

• Qi Liu, Rutgers, The State University of New Jersey

• Miklos A Vasarhelyi, Rutgers, The State University of New Jersey, Newark