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What is accounting fraud detection? Explanation of detection methods and effectiveness by AI
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Fraudulent accounting that occurs within a company can cause serious financial loss and loss of credibility to the company.In this article, we will explain the definition and risks of fraudulent accounting, preventive measures to prevent it, and effective investigation responses in the event that it does occur.
Definition of fraudulent accounting and differences from window dressing and inappropriate accounting
What is accounting fraud and why does it occur?I will explain the basic definitions and problems.
What is fraudulent accounting?
Accounting fraud is the intentional falsification of financial information created by a company.It refers to the act of misrepresenting the financial situation by recording fictitious sales and expenses, or concealing information necessary to properly grasp the financial situation.
Differences from improper accounting and window dressing
Words similar to fraudulent accounting include improper accounting and window dressing.Inappropriate accounting differs from fraudulent accounting in that it includes human error such as mistakes and lack of knowledge of the person in charge, and it does not matter whether it is intentional or not.
Accounting fraud is the same as fraudulent accounting in that it intentionally falsifies the financial situation, but it differs in that it refers only to the act of making the business situation look better than the actual situation.Conversely, the act of making it look like there is no profit is called reverse window dressing.
Background and causes of fraudulent accounting
The most common motive for fraudulent accounting is concealment of management distrust.In order to avoid being unable to receive loans on favorable terms from financial institutions and to avoid being held accountable by shareholders, the company pretends to be in good financial condition.
On the contrary, the reason for falsifying so that there is no profit is to reduce the tax amount.Decrease profits by reducing sales or inflating expenses.
These motives lead to fraudulent accounting when they are combined with an environment in which fraudulence can occur due to inadequate monitoring systems, or with an ethical sense that justifies what every company does.
Risks and Impacts on Companies of Accounting Fraud
Fraudulent accounting may result in criminal and civil liability.Criminal liability may include charges of fraud and illegal distribution.In terms of civil liability, there is also the possibility that a third party that caused damage, such as a bank that was forced to make a loan against a false financial situation or a shareholder whose stock price has plummeted, can claim damages.
If you declare less tax due to mistakes or misunderstandings, you will be subject to underreporting additional tax, but if malicious tax evasion such as fraudulent accounting is recognized, you will be subject to double additional tax with a higher tax rate.
Not only the economic loss, but also the loss of social credibility as a company that committed illegal acts.It can also develop into a situation that threatens the very existence of companies, such as being unable to receive loans from banks.
Examples of fraudulent accounting that actually occurred at listed companies in Japan
What kind of fraudulent accounting is actually being carried out?We will introduce examples from materials published by the Financial Services Agency.
Overstating of sales by subsidiaries, etc. (First Section of the Tokyo Stock Exchange, service industry)
Company A (a subsidiary of Company C), which sells and maintains copiers, etc., and Company B, which rents equipment, had a contract under which Company B would install copiers, etc. in the store and pay Company A for the installation.However, on the premise that Company B will be compensated for the rental fee, Company A camouflages the installation in the store and records fictitious sales.In addition, fraudulent accounting such as understating the cost of sales due to false recording of unsales and unrecording of purchases was also carried out.
As a result, Company C, the parent company of Company A, recorded excessive net income.The Securities and Exchange Surveillance Commission has recommended an order to pay a surcharge of 3565 million yen.
It is said that the causes were inadequate governance functions for Company C's subsidiaries, a lack of understanding of the business model, and an overemphasis on budget performance management.
Overestimation of sales (TSE XNUMXnd Section, outsourcing service industry)
Company D, which performs contracted call center operations, inflates the operating hours by pretending that absent operators are present.We overstated sales by overcharging our business partners.The Surveillance Committee recommended a surcharge payment order of 1200 million yen.
At the call center, there was a lack of awareness of complying with the "operation management rules" stipulated for daily business operations, and the management department accepted the fraudulent data handed over from the on-site manager without question and requested sales. It is said that it was caused by
Understating of cost of sales, etc. (First Section of the Tokyo Stock Exchange, electrical equipment industry)
At Company E, under the direction of the influential accounting staff at the time, a large amount of fraudulent accounting was carried out over a long period of time, including understating the cost of sales due to the recording of fictitious end-of-term inventories. Excessive net income and net assets were recorded.The Surveillance Committee recommended an order to pay a surcharge of 21 yen.
It is said that the cause was that the authority for accounting practices was concentrated in one person, that there was a corporate culture that did not emphasize appropriate accounting processing, and that the check function within the company was inadequate.
(Source: Financial Services Agency "Disclosure Inspection Cases" https://www.fsa.go.jp/sesc/jirei/kaiji/20210730/1.pdf)
Measures to prevent fraudulent accounting
What can be done to prevent fraudulent accounting?I will explain the measures that companies should take.
Strengthening the internal control system and its importance
Strengthening the internal monitoring system is extremely important.Rather than concentrating authority on one person in charge, we will establish a system in which roles are divided and transactions and contract details are mutually checked.It is also effective to set up an audit department as a monitoring system.In doing so, the audit department must have the authority to conduct investigations without restriction, even if the target is an officer, and the investigation system must be independent from the company.
Establishment of a whistleblower/whistleblowing system
The whistleblower system is a system that establishes a contact point for executives and employees to encourage reporting of illegal acts within the company.Accounting fraud becomes a habit the longer it is discovered, and the scale of it grows.If there is a whistleblowing system in the company, it will act as a deterrent and lead to early detection of fraud.In doing so, establish a system that protects whistleblowers so that whistleblowers can report with peace of mind.
Compliance training for management and employees, fostering a culture that does not tolerate fraud
Compliance training for managers and employees is also effective.Accounting fraud is a criminal act, and making people aware that they will be punished under the criminal law will lead to deterrence.By letting them know that it will be a big blow to the management of the company, it will also encourage employees to report whistleblowing.Let's spread awareness throughout the company that misconduct is unacceptable, and let us know about consultation desks and accusation destinations.
Development and strengthening of consultation system for external experts
If employees are aware that if anything suspicious is found, it will be thoroughly investigated, it will also act as a deterrent to fraud.It is also effective to consult with an investigation company that can conduct forensic investigations that collect and analyze data related to money and transactions, so that you can cooperate immediately if something happens.
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“Forensic investigation” is essential for fraudulent accounting investigations
If there is suspicion of fraudulent accounting, a forensic investigation by a specialized investigative company is effective.I will explain in detail what kind of survey it is and what kind of effect it has.
What is a Forensic Investigation?
A forensic investigation that collects and analyzes information related to a case to reveal evidence of crime or fraud.Investigating the cause will allow us to formulate measures to prevent recurrence, and by clarifying where responsibility lies, we will be able to prepare in the event that it develops into a lawsuit.
Why Digital Forensics Investigations Are Effective in Accounting Fraud Investigations
Digital forensics is a branch of forensic science that involves collecting and analyzing data stored on digital devices to uncover evidence of crime or fraud.If fraudulent accounting is suspected, evidence such as hidden backroom deals and money movements must be found.Evidence of fraud is not only documentary, but also electronic data such as e-mails and chats, so digital forensics is effective in analyzing them.
Evidence preservation is required for financial data, documents, emails, chats, call records, etc.
If your documents, emails, chat or call history, etc. have already been deleted, you will need to restore them from backups or repair the data.Professional skills and knowledge of an investigation company that specializes in digital forensic investigations are required.
Efficient forensic investigation using AI
Utilization of AI (artificial intelligence) is an essential tool in modern forensic investigations that handle huge amounts of data.Utilizing AI, which is good at analyzing large amounts of data, not only improves the efficiency of investigations, but also improves the accuracy of investigations by allowing experts to concentrate their resources.
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Points to note when requesting investigation of fraudulent accounting
We will explain the important points and selection criteria when requesting a forensic investigation of fraudulent accounting to a specialized investigation company.
Tips for choosing a forensic investigation company
When choosing a research company, the tools and technical capabilities used by the research company, and past research results are key points.The results of the survey will vary depending on the equipment of the survey company and the skill level of the engineers.In particular, data recovery requires specialized tools and advanced technical skills. The use of AI is also an important point.
Companies with a large number of investigation results have accumulated high technical capabilities and know-how on data recovery, so they can select the appropriate method for each case and respond at a reasonable cost.In particular, whether or not there is a track record of requests from listed companies, the police, government agencies, etc. is an important point in judging reliability.
Cost of request and how to determine it
Forensic investigations require a high level of expertise.When a forensic investigation is requested from a vendor, the cost of data processing and search, analysis and analysis (review) of whether it can be used as evidence, data hosting, etc. are included in the breakdown of the cost, but usually the review process accounts for the majority of the cost. occupy.The final amount varies greatly depending on the scope and contents of the investigation, and ranges from tens of thousands of yen to several million yen.
The use of AI in surveys has also been widely recognized recently, and significant cost benefits can be obtained by using AI to dramatically improve the efficiency of surveys.When collecting quotations, be sure to ask for the total cost including AI and reviews, and compare not only the unit price but also the overall cost.
Leave accounting fraud investigations to FRONTEO, a leading company in forensic investigations.
FRONTEO boasts an extensive track record in fraud investigations, and its strengths are its ability to quickly respond to incidents and its ability to propose and investigate solutions.
Recent forensic investigations handle huge amounts of digital data, so the use of AI (artificial intelligence) is essential, but FRONTEO makes full use of its own AI engine to quickly process large amounts of data.We have also introduced in-house developed software to handle various cases, realizing rapid and cost-effective forensic investigations.
Utilizing the knowledge gained from the overwhelming number of cases, we are fully equipped to respond to highly difficult investigations and respond quickly in the event of an emergency.We will strive to minimize damage and prevent recurrence.
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