Audit and Fraud Work Requires Financial eDiscovery

In the legal realm, traditional eDiscovery solutions have become popular to aid in uncovering key relationships and activities through documents, emails and social media activity, but to date the accounting profession lacks a parallel. Not to mention even these legal eDiscovery solutions don’t truly “follow the money” — but rather point to potential financial connections that then require further fraud investigation and valuable staff time.

Bank and brokerage statements and monetary transfers, arguably the most significant pieces of information to uncover financial fraud, have historically not been included or evaluated in technology tools — whether eDiscovery for the legal field or audit tools for those of us in the accounting profession.

While financial visibility has proven difficult to create in audits, fraudsters have continued to adopt new ways of moving money. Recent reports show that PPP loan fraud soared in the last two years, putting billions of taxpayer dollars in the pockets of criminals. Occupational fraud also remains a significant problem.

A recent report published by the Association of Certified Fraud Examiners (ACFE) titled, “Occupational Fraud: A Report to the Nations” evaluated 2,110 cases — and found them to have caused financial losses totaling more than $3.6 billion. Additionally, financial statement fraud, while less common, is cited as being responsible for the most amount of damage, with an average loss of $529k.

According to the same report, it is estimated that fraud takes, on average, more than 12 months to discover. The proliferation of data online, and increased activity in crypto, only magnify the opportunities.

Add to that, inexpensive access to capital and consistent economic expansion during the last decade has resulted in high risk and fraudulent activities being more easily masked and even rewarded. But as the money supply becomes more constrained and the cost of capital increases, liquidity, and the ability to access funds will become restricted.

This new macro-environment is bound to expose weak business models, high-risk investments, fraud, and Ponzi schemes. In short, the more the economy tightens, the more exposure of fraud we will see.

So, how can accounting professionals be ready for this wave of fraud cases — and more effectively “follow the money” in audits?  Some experts argue that the next decade will be one of new drivers, in particular technology, which is giving auditors significant new capabilities to measure risk and find irregularities — and in the longer term, market demand for more significant and faster assurance around a broader range of activities.

Whether managing audits or financial investigations for business valuation or other financial events, there is clearly an opportunity to evolve our long-held approaches. First and foremost, now is the time for firms to assess their audit practices and their choice of associated technologies, ahead of the expected surge in audits and financial forensic investigations.

Many technologies exist to aid in practice management, and sorting through those can be daunting. But in this day and age, it is important to evaluate the technologies that go beyond practice management tools, to include those that fundamentally address the work itself.

Incorporating financial eDiscovery tools is just one example. The technologies being introduced today can, at long last digitize information on bank and brokerage statements, check images, and monetary transfers, eliminating the need to undertake painstaking manual work while removing the risk-taking involved in sampling data. Ultimately, with financial eDiscovery, firms have an opportunity to improve staff utilization, limit or eliminate the need for sampling entirely, and significantly improve audit accuracy.

I’d argue that in the audits of tomorrow any document with the potential to show material and money movement will be digitized, and auditors will be able to look at the entirety of the financial data set, rather than a piece of it. Ultimately these new financial eDiscovery tools will forever change not only what data we can look at — but how quickly we can identify and close in on irregularities.

At long last, the technologies exist that allow us to create financial evidence as a comprehensive data set, speed its analysis, and provide finer details around what exactly happened to the money. In short, we can finally truly “follow the money.” Providing digitization of, and true transparency into financial documents was perhaps the last frontier, but moving forward, audits will begin to include these first as a matter of differentiation, and later as a matter of course.

By adopting new technologies and techniques, and removing manual procedures and short cuts like sampling, we will not only accelerate our work and remove risk, but we can also meet the moment and change auditing for the better.