How Artificial Intelligence Reduces Fraud In Business Accounting


As globalization and corporate capitalism continue to grow, major economic trends are increasingly dictated by multinational corporations.

To verify the pervasive negative influence of corporate events like accounting scandals, using tools like AI for fraud detection and prevention can be a good first step.

Enron is a name that even those with a little interest in international affairs will be somewhat familiar. It is one of the few companies that has won infamy around the world for corporate scandals that have had far-reaching effects on economies, government policies and business school curricula. Most notably, the Enron scandal led to the passage of the Sarbanes Oxley Act, which all American businesses adhere to today. It has also resulted in the unemployment of thousands of its employees and billions in losses for its investors. Being a highly celebrated action on Wall Street, Enron closed its doors after going bankrupt, shortly after the scandal came to light.

Almost two decades after the scandal, companies, much larger than Enron, now wield much greater influence than ever in the global economy. And any fraud committed in such businesses can have serious consequences not only for businesses but for society as a whole. This is why it is important to use a combination of best practices and technologies such as AI for fraud detection and prevention.

Why Business Fraud is a Top Concern for Everyone

While this is the least common type of business fraud, it is also the one that causes the most losses. Most corporate accounting scandals are driven by the need to earn and maintain investor confidence. This is exactly the first thing to do when a financial scandal is known. And there is no doubt about the other effects of corporate accounting fraud on the businesses in which it takes place. Reputation losses, lower credit scores, penalties and court-imposed settlements – these are just a few of the immediate impacts of business fraud.

The more fraudulent activity is perpetuated and goes unnoticed, the deeper the organization’s possible plunge when news of fraud arises. And in many cases, these companies are unable to fully recover from these setbacks. As markets become more competitive, the ground lost by companies caught up in major financial scandals is almost impossible to recover. But we already know all of this. What we tend to overlook are the broader implications of corporate accounting fraud. Let’s say news breaks out about an accounting fraud at a large global corporation. The immediate consequence will be a huge drop in the organization’s stock price. While a large part of the investments in these companies is made by individual investors, a considerable part is often held by pension funds and mutual funds, which are sources of savings and security for the future. for many middle to low income earners. Closing businesses for fraud can have a huge impact on these people. Likewise, many other consequences of corporate fraud can have larger economic ramifications and impact more lives than initially apparent. And just like the consequences of corporate fraud, the activities themselves are difficult to discern.

Why it’s hard to spot corporate fraud

The most common type of fraud in business accounting is when the books are manipulated to show that a business is performing better than it actually is. This can include reporting more sales than actually generated, underreporting expenses, and misreporting expenses or income. Fraud can also take the form of false statements of balance sheet items for the purpose of siphoning funds. In any case, any fraud worth mentioning is carried out by educated white collar workers with adequate financial know-how. They know what they are doing and are therefore adept at doing it surreptitiously. This is why the people involved in most high profile accounting frauds are usually those who know accounting the best.

Another common reason for financial fraud in business accounting is lack of oversight. Taking into account the number of transactions carried out each day, the control of the legitimacy of each transaction and each accounting entry is not achievable for any human being or even a team of human beings. At most, relevant staff can take random samples of ledger transactions and verify supporting evidence for the entries. Even in this process, such a check will have to be carried out for a large number of samples to be analyzed in order to exclude any errors and to confirm intentional tampering. For larger companies, this challenge is further magnified. It’s no surprise, then, that most frauds – a whopping 43% – are only detected following whistleblowing, and that only up to 15% of detections are due to internal audits. And an even lower percentage of 3% of detection is due to surveillance. This is where intelligent automation, such as that offered by AI, can play a huge role.

How artificial intelligence for fraud detection helps fight corporate corruption


As mentioned above, the biggest challenge in identifying fraud is the large number of transactions that must be monitored and reconciled to do so. By using AI technology in accounting processes, reconciliations and audits can be performed on a large scale and with the required levels of precision.

AI pattern recognition capabilities can help detect transaction entries that do not fit the standard pattern. It can analyze all transaction related information and supporting data to ensure the validity of transactions. For example, computer vision can be used to analyze receipts and invoices to reconcile accounts. It can cross-check the information thus obtained with transactional data from bank documents to verify whether a supposed sale has indeed resulted in an incoming cash flow. This can prevent businesses from overreporting their income.

Likewise, AI can also be used to track cash outflows and verify them against actual bank transactions. Additionally, AI can also be used to verify the names of vendors against those of payment recipients, so proxy accounts cannot be used for embezzlement. In addition to using AI to detect hijacking, misrepresentation, and other types of accounting fraud, businesses can also use AI to make their processes inherently anti-fraud.

How the use of artificial intelligence in accounting further minimizes the risk of fraud

Most cases of accounting fraud are orchestrated by the person (s) in charge of managing the accounts. It means the people who supervise, record and verify financial transactions. By eliminating as much as possible the need for human intervention in accounting processes, the risks of accounting fraud can be minimized. AI-based accounting systems can also be trained to apply accounting policies prescribed by internal auditors and regulations prescribed by government to cover all bases and further minimize the likelihood of accounting fraud. Fraudulent actions are primarily caused by a combination of three factors: a group or individual motivated to commit fraud, a target that can be exploited, and the lack of competent oversight. While the first two of them can be difficult to control, the third factor can be easily addressed. Using AI for fraud detection can provide the necessary oversight. And as we, as a civilization, evolve above our inherent greed and gullibility, we can let AI and other technologies like blockchain protect our financial well-being.

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