What drives fraud? Bad actors, both inside and outside an organization.
What allows bad actors to perpetuate fraud? In many cases, it’s bad processes and controls. Often, bad processes are the product of inefficiencies, gaps, lack of transparency, and poor control management, all of which allow bad actors to exploit an organization’s financial reporting weak spots and pursue their fraud undetected.
“People look at rules, they look at a control, and they say, ‘How far can I push this?’ ” said Michael Shultz, director of strategic accounting at BlackLine, a provider of cloud software that automates and controls financial close and accounting processes, during a May 25 Compliance Week Webcast on financial reporting technology. “You have to ask yourself, ‘What are people doing to find ways to structure around the rules?’ ”
Automation brings information together into one place, a control library—“the one source of the truth.”
The 2020 Global Study on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners (ACFE) studied 2,500 cases of fraud from 125 countries around the world and found different median losses depending on the type of fraud. Asset misappropriation fraud led to median losses of approximately $100,000. For corruption, it was $200,000. But far and away the most expensive type of fraud to organizations, the study found, is financial statement fraud, with a median loss of $954,000.
And how do these bad actors get away with their fraudulent schemes, according to the ACFE? (Many of the frauds studied involved more than one type of cover-up scheme).
The most common way to conceal fraud was to create fraudulent physical documents (40 percent), followed by altering legitimate physical documents (36 percent). If you think about that for a moment, that means 76 percent of fraud identified in the study involved physical documents in some way.
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The report found 27 percent of fraud also involved altering legitimate electronic documents, and 26 percent involved creating fraudulent electronic documents. Twelve percent of frauds—12 percent!— in the ACFE study did not involve any attempt to conceal the fraud but instead were hiding in plain sight.
Automating your firm’s accounting and financial reporting functions can help identify fraud in three ways, Shultz said.
First, automation can perform mundane tasks more efficiently and more accurately. That gives staff accountants and managers more time to focus on the risks faced by an organization and to incorporate the requirements of new regulations into its processes. Employees who are tasked with creating and vetting financial statements will have more time to analyze risks and search for fraud if they’re spending less time handling journal entries and reconciliations manually.
Typically, organizations prioritize front-end processes, finding new and more efficient ways to accept cash and credit cards, create new point-of-sale systems, and more efficient ways to process orders, Shultz said.
“But we’re not spending the same time and money on the last mile, all those journey entries, all that reconciliation that goes into creating the financial statements,” he said. “We need to make sure we’re spending time on all parts of the system. We shouldn’t be inserting risks into the last mile, or it all falls apart.”
Second, automation smooths out the workflow. All too often in organizations, there is a “crunch” of work when the year-end financial results are due or when an audit is being conducted. Automation centralizes information and makes it more transparent, Shultz said. Automation of financial processes allows auditors, with proper credentialing, to find all the information they need in the same financial reporting system the organization uses every day.
Third, automation brings all the information necessary for financial reporting in one place, where it can be seen by everyone who needs to see it. Fraud exists in dark corners, in areas of a business not receiving much scrutiny.
Automation brings information together into one place, a control library, which Shultz called “the one source of the truth.”
“Instead of different systems with copied documents, scanned documents, binder documents, and more, everything is brought under one roof, allowing you to have that visibility to make you more effective and more efficient,” he said.
One myth Shultz sought to dispel as he discussed the benefits of automation in financial reporting is that automation would replace people.
“We’re not advocating automation to put people out of jobs. It’s about repositioning and refocusing your folks on what is more important,” he said. “If the technology exists to automate a lot of these tasks, why not take advantage?”