3 Ways Accountants Can Use Big Data to Fight Fraud

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Fraud is everywhere. It is virtually impossible to pick up a newspaper, check the business news networks, or even scroll through Twitter without seeing evidence of fraud, hacking, and embezzlement. Ranging from the hacking of the federal government to small-time embezzlers seeking to cover gambling debts, fraud is an ever-present, growing, and increasingly dangerous threat to both businesses and the financial services profession.

There are several major trends that are influencing business operations in an increasingly active and progressively real-time manner. The proliferation of big data, increasing regulation, higher penalties for regulatory violations, and the need for consistent performance for publicly traded corporations creates an interesting challenge and opportunity for managerial professionals.

Stakeholder reporting – in and of itself an initiative representative of more transparent operations – does create additional pressure on reporting areas while simultaneously raising the possibility of exposing less-than-ideal operations and results. This additional exposure may very well encourage some areas to attempt to massage or otherwise manage their respective results.

The Fraud Triangle
Obviously, business managers and stakeholders do not want to engage in fraudulent activities, but the increasing demands for both reporting information and consistently improving performance create a situation where the classic fraud triangle may very well result.

Pressure. Pressure, in the form of stakeholder reporting, can be a clear driver of possibly unethical and fraudulent behavior.

Opportunity. Opportunity comes in the form of increased demands for information, and the more opportunities business segments, leads, and other professionals have to present results in a favorable manner, the more likely it is for those people to be tempted to enter gray areas of reporting results.

Rationalization. Rationalization, of course, is the easiest area to identify, and if bonuses, noncash compensation, and promotions are in play, it has been proven over and over again that otherwise ethical professionals may be tempted to begin to bend the rules.

The fraud triangle, as well as the underlying motivations for fraudulent and unethical activity, are not new or unique to the modern businessplace, but there are certain tools and techniques that are available to financial and other managerial professionals that can assist in the fight against fraudulent activity. This ongoing struggle is by no means simply an academic matter, and multibillion-dollar fines, sanctions, and other regulatory punishments are increasingly common for organizations found guilty of fraudulent or unethical activity.

How Big Data Can be Used to Fight Fraud
Big data, however, offers an intriguing method by which accountants can simultaneously increase the value they bring to the organization. The potential of big data has, until this point, focused primarily on the potential benefits and opportunities that leveraging technology can bring to operations, financial decision-making, and improving reporting metrics. These areas are obviously key to accounting professionals, but there is an additional angle that can, and should, be explored.

With increased insights into internal and external data flows measured versus market and internally prepared expectations, the implications could not be more clear. A major potential area of growth for big data adaptation and implementation is in the fight against fraud.

Information is the essential ingredient to any business, strategic plan, or initiative to combat inefficiency, waste, or possible illicit and fraudulent activities. As accountants are increasingly involved in activities other than strictly preparing financial statements, including IT upgrades and implementations, it is logical to conclude that professionals should leverage the tools at hand. Spotting gaps in process flows may not only save the organization time and money today, but allow managerial accountants and other management professionals to spot fraudulent activity.

Accountants – already immersed within IT, financial systems and reporting, and serving as the go-between for upper management, operations, and external stakeholders – are well-positioned to take a leading role in efficiency initiatives. At the end of the day, accounting and financial information systems serve a relatively simple role – the transformation of operational data into financial statistics.

Against this framework, and with the evolving role of accounting professionals in mind, there are several specific examples in which accountants can leverage big data to help combat fraud and possibly fraudulent activities.

  1. Analyze customer profitability, shopping habits, and shipping locations to determine purchase and payment patterns using big data tools to analyze shifts and trends, as well as irregularities, in real time.
  2. Take advantage of improved data collection and processing at operational facilities to improve inventory and other asset control. If operations has the ability to produce and monitor inventory information in real time, accountants can certainly take this information and use it to assist in inventory counts, valuation, and custody.
  3. Leverage the more frequent and real-time reporting requirements demanded of both organizations and financial professionals. More frequent reporting, and the data and analytics desired by the recipients of this information, necessitate that accounting professionals become more adept at leveraging internally available information and technology. Additionally, and perhaps most important of all, increased scrutiny and reporting allow accounting professionals greater opportunities to examine and analyze the data before it is disseminated to stakeholders.

In short, the pressures of competition and an increasingly diverse number of stakeholders interested in the financial reporting of the organization present a unique situation for many companies. On one hand, opportunities for unethical and potentially fraudulent activity continue to increase, as do the penalties associated with them, but this pressure simultaneously creates opportunities for accounting and financial professionals to create value for organizations. By leveraging technological tools and advances, including big data and analytic tools, accountants are able to glean insights and initiate ideas related to both operational efficiencies and to detect potential fraudulent activities.

Fraudulent and unethical activities cost organizations time and lost productivity, and leave the organization open to potential fines and penalties. Accountants are in a prime position to protect the organization from these potential penalties. Additionally, and perhaps more importantly, taking advantage of advances in technology and tools keeps accountants at the forefront of business decision-making and provides accounting professionals with new methods to showcase the value brought to the organization.

Reporting data is, and will continue to be, a core competency of the accounting profession, but as data and information continue to grow in importance, the quality of that data is increasingly important. By thinking outside the box – and linking together technology, quantitative analyses, and accounting information – accountants can help organizations find efficiencies, prevent fraud, and perform better.

About the author:
Sean Stein Smith, CPA, CGMA, CMA, has written for a variety of publications. He is a doctoral candidate at Capella University, as well as adjunct faculty at Fairleigh Dickinson University. He works for United Water/Suez Environment as a senior accountant, and may be reached at [email protected].

Related article:

Accounting Fraud: Prevalence and Prevention

About Dr. Sean Stein Smith

Sean Stein Smith

Dr. Sean Stein Smith, DBA, CPA, CMA, CGMA, CFE, is an assistant professor at Lehman College, part of the City University of New York. He is a member of the NJCPA Content Advisory Board, Student Programs & Scholarship Committee, Young CPA Council, Nonprofit Interest Group, and Accounting & Auditing Standards Interest Group. He can be reached at [email protected].



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By DataH
Jun 26th 2015 01:12

Sean nice view on Big Data. Many uses of big data have a measurable positive impact on outcomes and productivity. Areas such as record linkage, graph analytics deep learning and machine learning have demonstrated being critical to help fight crime, reduce fraud, waste and abuse in the tax and healthcare systems, combat identity theft and fraud, and many other aspects that help society as a whole. It is worth mentioning the HPCC Systems open source offering which provides a single platform that is easy to install, manage and code. Their built-in analytics libraries for Machine Learning and integration tools with Pentaho for great BI capabilities make it easy for users to analyze Big Data. Their free online introductory courses allow for students, academia and other developers to quickly get started. For more info visit: hpccsystems.com

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