Internal Audit and Fraud Prevention in the Technological Era:
Controversies of Opportunities & Threats

Organizations of all types and sizes strive to prevent fraudulent activities and detect them prior to actually happening, using all possible techniques. Internal audit has always been coupled with fraud prevention as a primary technique for fighting fraud. However, technology is changing the way auditing processes are being carried out. Ahmed Mamdouh & Co. Kreston Egypt is keen to keep abreast of the latest in auditing and fraud prevention. This article sheds light on how technology can be used for the good of auditing and fraud prevention.

Internal audit and fraud:

Fighting fraud is one of the main objectives every organization strives to achieve. This is directly related to the negative impact it has on the organization and the economy as a whole, where it causes huge financial losses, weakens social stability, threatens good governance and democratic structures, and leads to trust loss in the whole economic system.

Internal audit is one of the most prevalent tools for reducing fraud inside organizations. While fraud is widely viewed as any irregularities in the systems, internal audit refers to permanent reviews and checks over different processes to prevent fraud and achieve control over the institutional environment.

How is technology disrupting fraud occurrence, prevention, and internal audit?
Opportunities and threats:

Emerging technologies are disrupting almost every profession. Internal audit and fraud prevention are also highly impacted by the emerging technologies applications.

How technology is changing the traditional audit role: Opportunities

The audit profession witnessed a clear change in the traditional way of doing business, especially during the COVID crisis, which turned many processes to be carried out online. Of the multitude of technologies available, AI, RPA and blockchain are highly impactful on the audit profession. Recent statistics show that audit and fraud prevention are the most important AI applications for companies. AI can help in fraud reduction by providing several benefits, such as:
- Reviewing sales contracts and identifying those with the need for additional compliance oversight.
- Analyzing accounts payable data to find out which payment might violate contract terms.
- Reducing expense fraud by interpreting expense reports based on a historical set of expense fraud cases to identify spending patterns and employee behaviors and therefore detect suspicious acts.
- Detecting third-party risks through performing trend analysis of third parties, comparing them to one another, and finding out fraud risks.
- Detecting vendor fraud by scanning invoices, grouping them and performing trend analysis and comparisons highlighting possible vendor fraud acts.

On a complementary side, blockchain – a fraud-resistant superhero, as called by some sources – is the foundational technology that guarantees cybersecurity as a result of being a non-changeable verifiable record of transactions. The inability to change data entries of transactions provides a way of security.

Some specific digital technologies for fighting fraud now in the field include voice biometrics to authenticate callers based on their voiceprint and adaptive authentication, which is an AI fraud risk scoring capability to provide clear guidance to agents during a call-center call, among others.

Implications of AI, blockchain and crypto world on fraud: Threats

It’s usually argued that technological solutions help in improving the efficiency of the auditing process and smoothen the fraud prevention target by developing risk assessment measures to provide better environment control. On the other hand, it’s also a matter of fact that emerging technologies have posed new risks that complicates the auditing profession and add to the risks of fraud that are being faced by businesses and companies – adding cyber risks to the equation.

As discussed above, it’s widely believed that Artificial Intelligence, Blockchain, and data analytics are some of the most up-to-date tools that can be applied to the internal audit process and fraud protection to provide maximum protection and control. Though true, it is a matter of fact that these technologies per se introduce other risks and threats.

Take blockchain, for example, despite the fact that blockchain generally presents targeted solutions to some specific security issues, making fraud more difficult. Blockchain is viewed by many as an incomplete fraud prevention tool. This goes back to the fact that the validation process for blockchain can only see the order and process it, but it can’t understand the trading context and see if fraud is involved. So, although blockchain can validate inputs, the reality stays unseen if we add to this the fact that many of the fraud crimes are, in many cases, committed by the powerful, so blockchain would not be aware of double spending, for example, which tends to falsify the blockchain ledger and corrupt the whole process.

Other technologies considered game changers in the internal audit and fraud prevention processes, such as AI and RPA (Robotic Process Automation), also provide more fraud opportunities. This is possible through the fact that the robotic algorithms are originally educated by humans, which can corrupt the whole process and provide a systemized way for fraud.

The rise of cryptocurrencies is increasing the risk of financial fraud by bringing more scammers to the scene, which also asserts the importance of internal auditing functions.

As clear by now, emerging technologies are changing the audit and fraud area, providing both opportunities for fraud protection and fraud risks. Auditing should therefore be responsive to both opportunities and risks. Therefore, competitive auditing should adopt the latest technologies while still backing this with governing bodies and independent auditors that can set auditing standards on how technologies can be used in order to ensure that technology is used for the benefit of the profession. Assessing the risk landscape is also crucial for a strong auditing mandate, which requires highly skilled employees aware of the latest technologies, opportunities, and risks.

Ahmed Mamdouh & Co. Kreston Egypt keeps an eye on the auditing and fraud profession developments worldwide to make sure it is adopting the most up-to-date technologies. This goes hand-in-hand with providing strong governance standards that assure technology is being used only for the customer’s good while mitigating the possible fraud risks. This vision is embodied in a set of professional services provided by Kreston Egypt, such as external audits services, advisory services, limited reviews, statutory audits, compliance services, internal audits advisory services, and risk-assurance services, among others, all of which latest technologies are adopted and supervised by human good governance systems.

References:
https://www.mckinsey.com/business-functions/operations/our-insights/your-questions-about-automation-answered?cid=other-soc-twi-mip-mck-oth---&sid=7568374439&linkId=180446297
https://www.sciencedirect.com/science/article/pii/S2212567114008296
https://blog.lowersrisk.com/technology-fight-fraud/
https://www.cpajournal.com/2019/07/01/fraud-in-a-world-of-advanced-technologies/
https://arxiv.org/ftp/arxiv/papers/1802/1802.07228.pdf
https://www.wolterskluwer.com/en/expert-insights/how-can-internal-auditors-manage-cyber-fraud-risk
https://corpgov.law.harvard.edu/2019/07/08/emerging-technologies-risk-and-the-auditors-focus/
https://www.bnymellon.com/us/en/insights/all-insights/five-digital-technologies-for-fighting-fraud.html
https://2yk5pw17efo51uu78o217n2y-wpengine.netdna-ssl.com/wp-content/uploads/2021/06/afc_fraud-and-emerging-tech-artificial-intelligence-and-machine-learning_2021-04.pdf