Larry Bradley, Leadership | 10 February 2023
Over the past several years, there has been a series of high profile financial scandals involving large publicly traded companies. History has shown that despite the regulations and safeguards that are in place, frauds nonetheless occur.
Inevitably, when frauds occur, the question arises of “What were the auditors doing?” We understand this reaction. We accept that stakeholders look to us (as well as management and those charged with governance) to ensure the robustness and integrity of the financial statements.
Tools in the armoury
Rest assured that we’re working extremely hard, at KPMG and across the whole profession, to fulfil our professional responsibilities on fraud. We know that fraud or financial misstatement erodes trust. No auditor wants it to happen on their watch.
There are a number of key instruments to deploy. The single most important tool is in fact a state of mind: professional skepticism. It’s something we’re doubling down on and ingraining in every auditor. Going into every assignment with a questioning mind, asking whether key pieces of data are consistent with the whole, not taking thing’s at face value with substantiation, and stepping back to see the big picture – these are critical qualities and must be part of the DNA of every auditor.
Another important element is bringing in forensic specialists to review and validate the fraud risk assessments made by the audit team. This may include bringing in anti-money laundering or anti-bribery and corruption specialists for a deep dive. We have regular training and awareness modules on fraud too that ensure our auditors keep fraud in focus.
Needless to say, the rules and standards that KPMG professionals work to as auditors are also critically important. The International Auditing and Assurance Board (IAASB) that sets auditing standards is due to publish an exposure draft on ‘Fraud in the audit’ that is designed to look at ways of increasing even further auditors’ focus on fraud indicators and apply a proactive risk-based approach.
Technology on the frontline
All of these factors are really important – but there is another element, of course, that is increasingly coming into play: technology. Without a doubt, technology tools ranging from advanced data and analytics capabilities to artificial intelligence (AI) and machine-learning (ML) based algorithms will have an increasing role to play and they’re already in use today.
As Sebastian Stöckle, KPMG’s Head of Innovation, Global Audit says: “The potential of AI couldn’t be bigger. It allows us to analyze financial ratios and combine the insights with external data such as social media, adverse media reports and credit rating assessments to corroborate what we’re seeing in the financial statement analysis. This becomes even more powerful when we compare and contrast entities across a client portfolio or an industry peer group. It’s what we call a ‘too good to be true‘ analysis – looking for anything that stands out and raises an eyebrow.”
A new frontier through AI?
So how far will technology take us? AI is a broad term for a whole range of techniques. It all starts with unsupervised machine learning that works on the basis of identifying patterns within a population of data using statistical means such as statistical outlier selection methods. The next level of AI is supervised where observations of the past (e.g. known occurrences of and reasons for fraud) train machine learning models to identify similar behaviours in future data. This takes us into the most advanced reaches of artificial intelligence where through deep learning or neural networks, the AI teaches itself and makes its own rules as it learns. Its analytical power could be truly remarkable. Understandably, regulators are wary of ‘black box’ approaches that can’t be satisfactorily explained. If we don’t fully understand how the AI is operating, can it be trusted? And how can we appropriately document the steps and procedures that have been followed?
As our understanding of AI develops in the coming years, auditors will be able to rely on increasing levels of AI to support their work.
We’re speculating to a certain extent. But one thing is clear: technology has the potential to drive fraud detection and investigation capabilities to new heights. It’s something we’re actively pursuing and working on embedding ever more deeply into the audit, to give financial manipulation fewer places to hide.
