the risk management blog

Data Analytics as a “Survival Strategy” for Fraud Control

byMark Lowers | July 23, 2014

Big Data is becoming a resource in the fraud fighter’s arsenal as more companies are using data analytic software to look for anomalous patterns in internal data. This method has helped some companies monitor more data sources, cutting the time for detection and reducing the costs of fraud.

A recent post by Peter Goldmann of ACFE reports on the rate of adoption of data analytic technology, finding that the largest group is companies that have no data analysis program at all (almost 30%–see the bar graph).

Among the rest, the approach is used in various ways—on a case by case basis, based on the decision of an auditor or IT manager, as one tactic among others, and even as a strategic option by about 16% of the respondents.

Goldmann notes that recent changes in the auditors’ professional standards for fraud detection and prevention were updated in 2009. These changes are responsive to the emergence of an “automated world” where both fraudsters and examiners defending against them have more and more sophisticated digital tools at their disposal. The adoption of data analytics as part of fraud control and prevention is a survival strategy for modern companies.

There are several important reasons why companies should consider using data analytics as a key component of a fraud prevention strategy.

  • Data volume is increasing exponentially, making sampling for ad hoc analyses a problematic solution. Good data analytic software can be installed to monitor almost any amount of data on a routine—or even continuous—basis. There is hard work to be done in identifying and organizing internal data to identify typical fraud patterns (auditing experience continues to be essential), but the day-to-day effort to capture and analyze the data can be automated.
  • Typical internal audit controls can be subverted by clever fraudsters. The IT revolution is not restricted to white hat practitioners, as everyone knows. Data analytics can be set up to watch for anomalies in data flows that indicate the failure of internal controls.
  • Data analytics can be a cost effective option in a cost-cutting world. Every business continuously scans for ways to operate more efficiently, and digital applications are often part of the solutions. Once the data is organized around meaningful fraud patterns, automated systems can provide reports on demand, at a relatively low cost.

The continued evolution of digital operations is guaranteed. Even as it solves problems at lower cost, it creates new opportunities for fraudsters. Data analytics is part of the smart company’s answer to the threats of fraud.