A Link Between Technology And Accounting Fraud

Published Date: 02 Nov 2017

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Is there a link between technology and accounting fraud?

Auditing

Contents

Introduction:-

Huge scandals that have been affecting that, this profession had a result of fraudulent activity. The statistics are everywhere and its increasing with time. Fraud continues to run at contagion level throughout the world of accounting profession. Therefore in order to stabilise confidence in the organisations it is vital for directors and auditors to understand their role in the detection and prevention of fraud.

It is imperative to be aware that fraud and money laundering is a criminal activity. It is the duty of the management and directors of the company to prevent fraud and ultimately country’s legal system is responsible.

A decade ago in the year 2001 a US based company Enron, employed over 22000 employees and a turnover of $101 billion was investigated and was revealed that Enron’s financial statements were sustained substantially by systematic, and creatively planned, accounting fraud. There have been many issues over the years about companies being performing fraud, cessation of trading, and directors of the companies being arrested.

Another big scandal of fraud is of world renowned US based industry WorldCom, from 1999-2002. There were two kinds of frauds involved. Firstly, its accounting department was capitalising the line costs of $3.8 billion, rather than properly expensing them, to undervalue the company’s expenses. Secondly, there were thousands of bogus revenue entries, inflating the company’s revenues in the accounts of approximately $11 billion. WorldCom filed the largest bankruptcy protection in the history of United States.

Fraud can be further split into two parts:

Fraudulent financial reporting, deliberately misstating the accounts to make company look worst/better than it actually is.

Misappropriation of assets, theft of the assets of a business such as cash and cash equivalent items or inventory.

The company’s directors have a foremost responsibility for fraud prevention and detection. They should be awareness for fraud within their organisation and this should mark as a factor of their risk assessment and corporate and ethical governance procedures. By implementing an effective system of internal controls they should minimize the probability of undetected fraud occurring to a reduced level.

Responsibility of an auditor in fraud is limited to the detection of fraud and communicating it to management, than directors and ultimately to the users of the financial statements.

One of most expensive types of fraud is uncovering the fraud of the statement of the financial position, as it contains thousands of steps which require a lot of manpower and money.

This is where technology comes in. Technology has been playing a massive role in prevention and detection of fraud since quiet a long time now. New computer based fraud detecting software and techniques are being developed regularly. They only need heavy initial capital set up, later on it can save a lot of expense in using manpower to perform fraud detecting procedures. It has been helping in providing a fairer and truer picture of the financial statements to its users.

The auditors are using technology extensively in performing the audit procedures in prevention of fraud. The use of computer as a tool to perform audit procedures is often referred to as a Computer Aided Auditing Techniques or CAAT for short.

There are two major categories of CAAT;

Audit software; and

Test date

Audit software

Audit software is used to interrogate a systems of the client. The programs show the result so that they can be investigated on advance level.

Precise trial they can perform includes

Extracting samples according to specified criteria, such as;

Random

Over a certain amount

Below a certain amount

At certain dates

Ratio calculation and indicators that fails to gather certain predefined criteria (i.e. benchmarks)

It checks errors in arithmetical accuracy (for example additions)

Preparing reports (budgets vs. actual)

Stratification of raw data (such as receipts by customer or their age)

Automatically produce transcripts for customers & suppliers

Tracing transaction through the computerised system

These procedures make the auditor’s task easy by selecting samples for testing, identifying risky areas and by performing certain number of substantive procedures. (Transparency International)

Test data

Test data provides the auditor to enter dummy figures into the client’s system to make sure that the system properly processes it and that it detects and corrects misstatements. The main reason of this is to experiment the operation of submitting controls within the system.

To be doing well test data should comprise both error containing data and without error data. Example of errors include

Codes that does not exists, e.g. of customer, supplier and employee

Transactions above pre-determined links, e.g. salaries above contractual amount, credit above limits agreed with customer

Invoices with arithmetical error

Submitting data with incorrect batch control totals.

Data may be processed during a normal operation cycle called as Live Test Data or in a run externally the standard operational cycle is known as Dead Test Data. Both have its pros and cons

Live test data can hinder in the operation & master files.

Test dead avoids this accounting but only provides assurance that the system works when the operation is not live. It cannot be reflection of the constraint when the system is under normal conditions.

Advantages of using CAATs for detection of fraud

CAATs allow the auditor to:

Separately access the data storage on a computer system without dependence on client, hence, not relying on the party which may be involved in the fraud.

Test the reliability of the client’s fraud detecting software, i.e. the result of which can be used to measure control threat and design additional audit procedures.

Using computer based calculation increase the accuracy of the audit tests

Perform audit test more efficiently, which can detect fraud step by step from every department of the business, hence, in long term results in fairer and truer presentation of the financial statement. (Customer Success Symantec Implementation)

Drawback of using CAATs for detection of fraud

CAATs can be pricey, the software had to be either purchased or designed in which situation the IT staff will be needed.

Client’s permission and cooperation may be difficult to obtain

Potential in compatibility with the client’s computer system

The audit team may not have required IT skills and knowledge to create the multifaceted data extracts and programming required

Data can corrupted & lost in the application of CAATs

Other techniques

There are many other types of CAAT that are becoming more and more widespread as computer expertise develops, although the expenditure and sophistication drawn in currently limits their application to the accountancy scope. These include

Integrated test facilities

This involving the formation of model ledgers and records to which the test data can be sent. This enables new repeated and efficient test data measures to be calculated live and the information can merely be avoid.

Embedded audit software

This requires a purpose written audit programs to be embedded into the clients. The program designed to present specific tasks comparable to audit software with the benefit that it turned on and off according to the auditors wish throughout the accounting year. Hence, the auditor will be allowed to gather information on specific transactions, to be tested later and will also classify peculiarities that require consideration during detection of fraud. (How you can stay safe and secure online)

The practical implication of CAATs

As previously mentioned CAATs will be extremely useful for assisting with sample selection to test the level of fraud through stratification and other techniques, For example, identification of;

Receivables, payables or inventory balances over a certain age

Individually material assets and liabilities

Transaction over agreed limit, e.g. customer’s credit limit

Changes to standing data, e.g. authorised suppliers lists

Credit balances within receivables and debit balances in payables

Non-current asset purchases over a certain amount

It is important and foremost step in detection of fraudulent activity in a business to check if these basic figures are over or under estimated.

CAATs can also be used to perform certain substantive procedures such as;

Ratio calculations

Recalculations of non-current asset depreciation

Recalculation of employee taxes. state pension schemes and employment pension scheme

Confirmation of batch totals to individual records, e.g. wages and salary payment to the payroll records

Casting of ledger balances

Practical example of software for fraud detections

Microsoft Excel

The use of active data add-in for excel is a basic method used in fraud detection. It is user friendly and does not require much IT skills to operate, hence, it makes it easier for auditors and management of business with fewer computer skills to be able to catch fraud. Active data is a cheap set up and can be used to stratify data easily. It walks through 14 basic detection of fraud

Recovery of cash

Account payable balance check

Account receivable balance check

Non-currents assets balance check

Credit limits

Transaction over agreed limit with customer

Duplicate payments

Un necessary charges

Erroneous payments

Improper accounting

In efficient payment processing

Potential risks

Individual ledger assessment

Stratification of data

SAS-Social Network Analysis

This is a powerful and unique technology designed to detect and prevent fraudulent activity to carry out a thorough analysis in minutes on the relationship between applications, accounts, individuals and claims.

Alongside with detailed and comprehensive reports, standard formats and dossiers. For rapid insight results are displayed visually through network diagrams and charts.

This is very useful software in banking network. It enables them to;

Vividly see and understand activities related to fraud, helping in revelation of all individuals involved in fraud, from suspected party to their associates, while understanding their behaviours and relationship.

Through fast and highly accurate analytics it can identify more fraud with quiet a correct estimation. Helps in tackling number of fraudulent activities at a time. It gains a better results and understanding of possible threats in order to take actions in prevention

It tackles with the current fraud and help in future prevention of the same mistake by detecting, investigating and gaining a better understanding of the current fraud

The efficiency level of this software is excellent as compared to related fraud detection software, feedbacks from its users typically quote that it takes half to one third of the time of what is usually required with related software in investigating the fraudulent activity, hence, it transforms the efficiency of fraud investigation to a whole new level

Minotaur fraud management software

Minotaur fraud management solutions provide wide protection against a number of fraud types. This competent software is capable of detecting frauds using variety of methods, to empower firms to take care of themselves and their accounting records against the present fraud threat.

Minotaur fraud detection software helps businesses to outset the prospective customers and to identify possible customers with fraudulent record before providing them with goods and services. It also reviews their profiles on regular basis to monitor day-to-day activities of all of its customers, along with transactional activity, to find suspects or unusual behaviour of the customer which could indicate fraud or money laundering. This software also monitors similar activities of the organisation’s employees and catches internal fraud effectively.

Few of Minotaur software’s features are unique from similar software of use for fraud detection; (Arfat)

Advanced detection techniques

Usually software reply only to traditional based rules and methods of fraud detection. Minotaur provides much more comprehensive service by maintain a behavioural modelling and predictive analytics, which creates a huge difference in un correct raios and rates.

Multiple date feeds

Unlike other software systems whose ability is limited to monitor usage only, Minotaur figure out other sources within an organisation that can be profiled to predict fraudulent activity. It allows the business to create a profile of practically unlimited amount of data feeds from which ever part of the business it wants. It is a highly accurate estimated fraud detection system.

Supplier independence

This software allows a business to configure their rules, regulations and data accounts after the setup independently, meaning an organisation can fully customize the software according to its needs. New rules can be created and old be deleted in the matter of minutes, maintaining a new task account e.g. company’s new service policy, or adding an entirely new set of records are very quick to make.

Stopping Fraud at the point of application

This software applies predictive analytical models at the stage of application which helps a business highlighting the fraud at the point when an individual is trying to do a fraud activity in the system. Such as;

Meditation functions e.g. (Decoding, collection, error detection as well as error correction)

Data pre-processing e.g. (Data partition, data validation, data filtering, rating calculations, load balancing)

First stage event analysis e.g. (Rules/threshold, Behavioural models, predictive analytical models, high usage detection)

Second stage alarm analysis e.g. (Case histories, Rules/threshold, predictive analytical models)

Case investigation e.g. ( Data mining, workflow, escalation, link analysis, external communication)

Conclusion

The role of technology has greatly enhanced and discovered new ways of detection and prevention of fraud. Technology has played a major role in strengthening the audit profession and regaining the trusts on auditors and organisations which was lost a decade ago due to some major scandals of world renowned organisation being caught in doing some massive fraudulent activities of the history. Technology has made the fraud detection work much easier and simple. Therefore, it will be true to say that technology and accounting fraud are closely linked.