Generative AI has taken the world by storm. But it is not all that advantageous, there are many downsides to AI. Every one in 4 organizations restricts their users from using AI. And there are reasons, especially in the accounting industry. However, restricting the use of AI has very little to do with the ability to push fraudsters away.While many argue that artificial intelligence helps make the lives of accountants easier, there are many layers to it. The world has come closer. We have our lives online and that is exactly what fraudsters take advantage of.
It’s a game of cats and mice between accounting firms and fraudsters, where the latter is constantly trying to stay one step ahead of all precautions. It is not enough to take preventive measures to keep businesses away from fraud. Leaders need to be mindful of keeping up with the customer’s ever-evolving needs too.
The evolution of fraud in the modern landscape:
When the Industrial Revolution came about, there were a significant number of economic changes. Large-scale manufacturing, the rise of joint stock companies, and the separation of ownership from management generated new opportunities for financial misreporting. One of the earliest known large-scale frauds took place in 1720. The South Sea company was involved in trade with South America, where they were engaged in speculative trading of shares. There were false claims about the company’s profitability, which led to a stock market bubble that eventually burst. It led to financial losses and brought the entire industry’s focus on the need for regulatory oversight.
In the late 19th and 20th centuries, fraud in financial reporting became more nuanced. There have been instances where companies like Enron and WorldCom manipulated complex financial tools and accounting techniques to inflate profits and hide debts. These cases made the need for a stringent accounting standard and regulatory framework even stronger.
What do new-age scams look like?
ChatGPT is one of the most common tools that everyone has been using, including accounting professionals. But the dark web equivalent of ChatGPT, FraudGPT, has made things a cakewalk for criminals. From creating realistic videos of profit and loss statements to fake IDs and false identities – they can get very convincing.
One of the most common ways of modern-day scams is emails. About 65% of respondents, in a recent survey by the Association of Financial Professionals, said that their organizations have been victims of attempted or actual payment frauds in 2022. Of the ones who lost money, 71% were through emails.
Phishing emails are among the top email scams. These fraudulent emails pose as a trusted source, asking the receiver to share confidential information. Once criminals access their details, they can get hold of their bank accounts or even commit identity theft.
Besides email scams, here are some of the most commonplace frauds that accounting firms are susceptible to:
- Cybercrime and data manipulation:
While the digital age has brought the world closer, giving accounting firms access to a pool of global talent, they have also been instrumental in introducing new forms of fraud. These include cyber fraud and data manipulation. Hackers can now infiltrate financial systems, alter records, and drain business funds at an alarming rate. Today, many firms deal in cryptocurrency and use blockchain technology. While they offer transparency, they also present new risks and fraud channels.
- Complex financial tools:
Modern financial markets use complex tools and means, such as derivatives. While they help in understanding the actual financial status of a company, there are many dangers. Misuse of mortgage-backed securities and derivatives triggered the 2008 financial crisis. Cases like that help mirror the dangers of such tools.
- Globalization and cross-border fraud:
Globalization has played a great role in making way for multinational corporations and a swift change in the economic landscape. However, the different regulatory environments also create a loophole for cross-border fraud. The criminals exploit regulatory arbitrage and the lack of coordination between international regulators.
Key tips in Fraud Prevention:
- Test new data sources continually
- Set custom workflows. Use logic and risk thresholds
- Be wary of customer behavior from day one
- Monitor fraudulent activities constantly
- Deploy multi-layer authentication and monitoring systems
- Review flagged activity, collaborate with other team members, and make approval or denial decisions collectively
- Partner with fraud mitigation experts to understand fraud trends, tools, and techniques
Deep-dive into fraud prevention:
- Technological solutions:
Artificial intelligence and machine learning have become integral to the accounting landscape. While they pose threats, they are the tools that can be instrumental in fraud detection. AI and ML, when used correctly, can help analyze large datasets to identify unusual patterns and anomalies that may indicate fraud. The emergence of blockchain also offers solutions. They can help provide an immutable and transparent ledger that can reduce the chances of data manipulation.
- Regulatory Reforms
Regulatory requirements are constantly changing and it is important to keep up. Continuous updates to such frameworks are necessary to keep pace with the evolving nature of fraud. International cooperation among regulators can help address cross-border fraud issues. Understanding and maintaining standards such as the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP) should be regularly updated to know all about the new challenges.
- Organizational culture and ethics:
A lot of the frauds that occur within accounting firms is an insider job. A strong culture within the firm is important to prevent fraud. This includes setting a tone at the top that emphasizes integrity and ethical behavior. Leaders need to set a whistleblower protection mechanism and robust internal controls. They are important in building the fraud-prevention strategy.
- Ongoing education and training:
Many firms fall prey to fraud because they aren’t aware. Ongoing education and training for accountants, auditors, and financial professionals are important to know about and combat the evolving fraud tactics. Professional bodies such as the Association of Certified Fraud Examiners offer certifications and resources that help professionals develop the skills needed for fraud detection and prevention.
Use Outsourcing as a means to beat the evolution of fraud – End Note
Accounting firms deal with a lot of complicated and confidential information. It is best to outsource functions like internal audits and financial analysis. This allows firms to get a bird-eye view of the fraud scenario. Outsourcing firms have a team of professionals who are adept at flagging fraud-related issues. They are also independent and unbiased in their analysis and conclusion of situations. The independent scrutiny helps strengthen the overall integrity of financial reporting and enhances the effectiveness of internal controls.
Want to outsource your accounting and audit functions? Write to us at connect@finsmartaccounting.com for more.
Director Growth Strategy & Alliance
Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.
