How AI-driven fraud detection tools lend themselves to the new audit reform

Lindsay Ross - February 5th, 2021

Today’s article in the Financial Times ‘UK directors face new liability demands under major audit reform’ (February 5th, 2021), is yet another headline contributing to calls for a major shake up of the audit industry and puts further pressure on UK Directors to be personally liable for the accuracy of their company’s financial statements.

The new business secretary, Kwasi Kwarteng, will announce the long-delayed reform in a white paper next week. The ‘over 200-page’ paper will include significant changes to the audit industry after the accounting scandals of companies like Carillion and Patisserie Valerie.

Michael Izza, Chief Executive Officer of Engine B’s industry partner, the ICAEW, said: “This will be a corporate governance reform, just like the audit profession. We have been waiting for this consultation for a long time and we are happy to move forward.”

The new audit reform offers greater powers to investigate and sanction auditors, with the scope to pursue company directors. The main highlights of the new audit reform include:

1. Non-board directors of organisations will be liable for the accuracy of their company’s financial statements

The audit reform will ensure non-board directors are personally liable for the accuracy of their company’s financial statements through the approval of internal controls and risk management, with non-compliance resulting in fines or temporary sanctions.

2. Audit quality, effectiveness, and detection of fraud

From an audit perspective, the paper will address concerns about the quality and effectiveness of audits and recommend a series of radical career reforms led by “Big Four” companies – EY, KPMG, Deloitte and PwC.

3. Separation of audit and advisory work

To end allegations of conflict of interest, the reform supports the Big Four’s operational separation of audit and advisory work.

4. Managed shared audits

“Managed shared audits” for all FTSE 350 companies to allow small “challenger” companies to appreciate the “meaning percentage” of corporate business, such as subsidiaries.

What do these new changes mean for audit firms?

The audit reform will make it a requirement that audit firms look for fraud and abuse, a problem highlighted by the scandal of companies like Patisserie Valerie.

These highly publicised scandals served as an urgent wakeup call to auditors and regulators to re-think the purpose and scope of audit, certainly within the context of greater availability of data and technology to augment professionals.

It’s about quality data and AI-driven technology that detects fraudulent activity

The future of accountancy and audit is no longer about transactional number-crunching, but about the sound judgements that can only be made from better quality data. Today’s auditors are drowning in data and to compound this, they only sample data to complete the audit. Sampling data is not enough to capture the whole story. These two factors create a high probability that a fraudulent transaction will not be captured in the auditor’s sample and therefore will go undetected.

There is a need for a more intense drive for innovation and the rapid implementation of technology across all firms, regardless of size. However, this is not happening quickly enough and, in many cases, it is not happening at all, due to both cultural and structural issues deeply embedded in the industry.

The audit industry is approaching a period of intense and far-reaching transformation, driven by digitisation, new audit reforms, innovation and intelligent data use. The lateral solution to the problems associated with audit, therefore, must be to adopt technology to implement an ‘Always-On-Audit’ approach, as standard. Over the next 12 months the use of Artificial Intelligence (AI), such as Knowledge Graphs, to remove and reduce fraud will be on the increase. Intelligent tools like this will create the context and visibility needed so that audits cannot fail. The accounting industry must turn to AI to help spot fraud and to prevent further scandals damaging the reputation of the sector.

Find out more about how Engine B is helping audit firms to improve audit quality and detect hidden risk, faster by reading our Audit Common Data Model Guide.

 

 

 

 

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