What is accounting fraud detection, and how does AI detect it and how effective is it?

AI (Artificial Intelligence) detection is an effective way to prevent internal accounting fraud. This article also explains the definition of accounting fraud, its risks, preventive measures to prevent it, the effectiveness of AI detection, and effective measures to deal with it if it occurs.

What is accounting fraud?

This article defines fraudulent accounting and the risks it poses to companies, as well as preventive measures and detection methods.

Fraudulent accounting definition and overview

Fraudulent accounting is the intentional falsification of financial information prepared by a company. It refers to the act of falsifying financial conditions by recording fictitious sales or expenses or concealing information necessary to properly assess business conditions.

Risks and Damages Posed to Companies by Accounting Fraud

Accounting irregularities may result in criminal or civil liability. Criminal liability may include charges of fraud and illegal dividend payments. In terms of civil liability, the company may be sued for damages by third parties who caused the damage, such as banks that were forced to provide loans in response to false financial conditions, or shareholders whose stock price has plummeted.

If a taxpayer declares less tax due to a mistake or misunderstanding, an additional tax for underreporting will be imposed. If a taxpayer maliciously cheats and is found to have evaded taxes, as in the case of accounting fraud, a heavy additional tax at an even higher rate will be imposed.

In addition to economic loss, the company loses social credibility and competitiveness as a company that has committed illegal acts. The company's very survival may be threatened, as it may be unable to obtain loans from banks and other financial institutions.

How to prevent accounting irregularities

To prevent accounting irregularities, it is important to strengthen the internal monitoring system. Instead of concentrating authority in the hands of a single person, establish a system in which roles are shared and transactions and contracts are mutually checked.

Compliance training for management and employees and an internal reporting system are also effective. Making each individual aware that accounting irregularities are criminal acts and can be punished under criminal law, and having a point of contact where they can feel comfortable consulting with and reporting such irregularities will serve as a deterrent.

How to detect accounting irregularities

The use of AI is an effective way to detect accounting irregularities as quickly as possible. It is not easy to detect hidden fraud in financial information that has been intentionally falsified, but by using AI to save labor and increase efficiency, it is possible to detect and uncover fraud at an early stage.

Detecting accounting irregularities with AI

This section describes the mechanism of detecting accounting irregularities by AI machine learning, its effectiveness, and the benefits to be gained.

What is machine learning of AI?

In machine learning, a machine, or computer, reads a lot of data and finds patterns or rules in the data. When the computer is given new data, it is able to classify and predict the data by applying the patterns it finds. Machine learning is used in a variety of fields because it can process large amounts of data more automatically than human labor or programming can do.

How AI is used to detect accounting irregularities

By having AI machine-learn past fraud data and set it to generate warnings when the data is similar to past fraud cases, the inappropriate areas can be detected as signs of fraud.

Effectiveness of Fraudulent Accounting Detection with AI

It is extremely difficult, even for experts, to find suspicious points in corporate financial information, which consists of complex and voluminous materials and data, such as spreadsheets. The use of AI, with its high processing power that surpasses that of humans, can help prevent oversights and lead to early detection.

Advantages of Using AI for Detecting Accounting Fraud

AI's machine learning-based discrimination has a wider range of responses than human rule setting, and AI may be able to learn and respond to new methods as the latest ones emerge. Not only can AI detect more fraud, but it can also learn on its own, increasing its accuracy and responsiveness. In addition, AI can check and respond to fraud detected by humans, thereby reducing the cost and time spent on monitoring.

Forensic Investigations Needed to Investigate Accounting Fraud

If accounting irregularities still occur, a forensic investigation by a professional investigation company is required.

What is a forensic investigation?

It is a forensic investigation that gathers and analyzes information related to a case to reveal evidence of criminal or fraudulent activity. By determining the cause of the crime, measures can be taken to prevent recurrence, and by clarifying responsibility, it is possible to prepare for litigation should it develop into a lawsuit.

The Need for Digital Forensics

Digital forensics, a field of forensic science, is an investigation that collects and analyzes data stored on digital devices in order to uncover evidence of crime or fraud. When accounting irregularities are suspected, evidence of backroom deals and money movements that are being concealed must be found. Since evidence of fraud often comes not only from documents but also from electronic data such as emails and chats, digital forensic investigations that analyze such data are effective.

Points to Consider when Selecting a Forensic Investigation Company for Accounting Fraud

When choosing a forensic investigation company, consider the tools and techniques used by the company, as well as their past performance. The results of an investigation will vary depending on the facilities of the investigation company and the skill level of its engineers. In particular, data recovery requires specialized tools and advanced technical capabilities, and the use of AI is also important. A company with a large number of survey results will be able to select the appropriate method for each case at a reasonable cost because of its high technical capabilities and accumulated know-how in data recovery. In particular, whether or not the company has a track record of requests from listed companies, the police, or government agencies is an important factor in determining reliability.

AI-based analysis and forensic investigation efforts

The use of AI (artificial intelligence) is essential in today's digital forensics, which deals with enormous amounts of data. Whether or not an investigation company is able to utilize AI is one of the key selection points. Utilizing AI, which excels at analyzing large volumes of data, not only improves the efficiency of investigations, but also enhances the accuracy of investigations by allowing experts to focus their resources.

In the detection of accounting irregularities, it is desirable to have an investigation firm that can not only detect fraudulent numerical data hidden in accounting data with the power of AI, but also analyze some signals related to the occurrence of accounting irregularities, and capture the process of fostering irregularities.

How to determine the cost of a request and how to determine the cost.

Forensic investigations require a high level of expertise. When a vendor is hired to conduct a forensic investigation, the costs include data processing and retrieval, analysis and analysis of potential evidence (review), and data hosting, with the review process usually accounting for the majority of the cost. The final amount varies greatly depending on the scope and content of the investigation, and can range from tens of thousands of yen to several million yen.

In addition, awareness of the use of AI in surveys has been spreading recently, and significant cost benefits can be obtained by utilizing AI to dramatically improve survey efficiency. When gathering estimates, be sure to ask for the total cost, including AI and review, and compare not only the unit price but also the overall cost.

For corporate accounting fraud investigations, go to "FRONTEO" for highly accurate and efficient investigations using our self-developed AI.

FRONTEO, which boasts a wealth of experience in fraud investigations, is strong in its ability to propose and investigate proposals that speedily respond to incidents and lead to solutions.

Recently, forensic investigations handle vast amounts of digital data, so the use of AI (artificial intelligence) is essential. FRONTEO makes full use of its self-developed AI engine to quickly process large volumes of data. FRONTEO also has in-house developed software to handle a wide range of cases, enabling us to conduct forensic investigations quickly and at a high cost-performance ratio.

We are also fully capable of handling difficult investigations based on the knowledge we have gained from our overwhelming number of cases, and we respond quickly in case of emergency. We strive to minimize damage and prevent recurrence.

Fraudulent accounting is detected by FRONTEO's AI, which can even capture the "process of fraud.

Fraudulent accounting detected by AI generally involves the detection of abnormalities in accounting figures, i.e., financial indicators, and fraud risks. However, when accounting figures are falsified, there must be a path to the fraud, such as interactions between the parties involved.

FRONTEO's fraud detection system with AI "KIBIT" analyzes the chats and e-mail messages of the parties involved and captures the process of fraud. FRONTEO can detect the process leading to fraudulent accounting in aspects other than numbers. FRONTEO provides effective investigations that not only detect fraud but also prevent its recurrence.