Will new tech improve audit and counter fraud?

The exponential rate of growth of technological development is greatly influencing organisations, especially in the financial services industry, resulting in unparalleled opportunities for improvement and innovation.

For example, 74% of all banks across the UK expect to eradicate human interaction from their retail banking function within the next decade, and 83% acknowledge that they are not supplying the kind of bespoke innovation that digital-savvy customers expect.

Financial innovation can be described as producing and commercializing novel financial instruments/technologies. It takes place in markets and institutions. Cumulative financial innovation, over time, has resulted in the efficient movement of capital and has led to economic growth. Financial innovation can significantly reduce transaction costs, improve security, and potentially lead to superior efficiency.

On the other hand, fintech delivers disruptive or enhanced innovations to the market, which still utilizes the existing financial infrastructure. Therefore, financial innovation does not necessarily require technology, whereas fintech demands the utilisation of technology.

These changes pose just as many threats to established financial service providers as to the accountancy profession, including the audit and fraud detection profession.

Distributed ledgers’ threat to audit

The audit profession is poised to be disrupted by fintech. Audit involves the examination of a company’s revenues, expenditure, review of the robustness and effectiveness of its systems, and compliance with internal and external controls. The economic context has already changed because of the internet, coupled with the digital transfer of money or cryptocurrencies through distributed ledgers, is potentially altering the way financialaudits are executed.

Blockchain is the distributed ledger technology that produces an incorruptible ledger of blocks of information that can theoretically be anything from copyright information to financial transactions. Blockchain was based on an open access model so that anyone can possess a copy of the ledger and change it.

According to analysts, peer-to-peer networking creates new audit challenges because technology has allowed corporations to cultivate self- auditing and distributed ledgers that are potentially absolute and self-verifying, thus dampening, if not potentially eradicating, the phenomenon of accounting fraud.

It is argued that that the current model of audit is insufficient to deal with the challenges posed by digital money transfer, storage, and distributed ledger technology. Contemporary audit techniques are not designed to handle the complexity of distributed ledgers, the multiple jurisdiction nature of money/cryptocurrencies, and the time stamping of transactions.

Companies are producing and analysing ever more data, including that from alternative sources such as social media.

At the heart of these changes is the vast amount of data that the auditors and antifraud professionals need to utilise. The growing volume of multivariate sources of data, which includes audio, visual, text, and video, demand greater storage capacity.

Therefore, the author believes that the audit and anti-fraud profession seems increasingly out of touch in this data/information concentrated, fast-paced environment, making it increasingly challenging for fi rms to fulfil the needs of their clients, and threatening their very existence in the current form.

The impact of blockchain and ‘big data’ on audit and accounting fraud

As blockchain technology becomes more universal, there will simultaneously be greater opportunities for audit fi rms and their clients, but the nature of audit and fraud detection will change.

Blockchain technology ensures the efficiency and reliability of audit by supplying a real-time, auditable log of ordered evidence of events that are immutable and also immediately accessible.

The use of big data analytics (BDA) allows auditors and fraud investigators to study large data sets more effectively and efficiently, which informs the risk assessment undertaken during the early stages of the audit or investigation, allowing effective planning, especially audit planning.

However, the seemingly endless data from multiple sources can be of little credible use and unconnected. Therefore, auditors and fraud investigators need to have a concrete understanding of the data they are analysing and investigating.

Analysis of high-volume data sets can result in outliers for which the auditor or fraud investigator may not have the requisite skills, time, or budget to fully investigate.

Another urgent problem is the appropriate identification and adoption of BDA tools. This problem is compounded by the fact that auditors or investigators may not possess the necessary IT skills to analyse big data.

This is forcing firms to significantly invest in the right BDA and attract and retain the best talent. Any operational savings accruing from BDA and blockchain technology will be off set by higher training costs or investing in data scientists.

Notwithstanding the assurance of unalterable, consistent, and distributed databases, blockchain technology faces specific data risks. Although consistency is ensured by the distributed ledger, this creates an expense every time it becomes necessary for a record to be checked with every other record to ensure it is unique, significantly increasing the time necessary to reach an agreement and corroborate the transaction.

Other threats stemming from the use of advanced technologies are overreliance on data collecting and data analysis software solutions, overconfidence in the results of the performed data analysis and, consequently, development of confirmation bias, which negatively affects professional judgement and professional scepticism.

In the new blockchain- and BDA- driven world, it is acknowledged that even testing 100% of a data population does not suggest that an auditor is able to supply more than a reasonable opinion.

Faisal Sheikh is an IFA fellow, author, and lecturer in accounting & finance at Salford Business School. This abridged and edited excerpt is from the book “When Numbers Don’t Add Up”, by Faisal Sheikh, copyright 2021. Published by Business Expert Press. For more information, please visit businessexpertpress.com.