[Accounting in the AI Era] ① Increasing Fraud... Detecting Anomalies and Preventing Embezzlement

Main perpetrators of accounting fraud are mainly executives... Possibility of increased embezzlement due to economic downturn
Strengthening digital audit capabilities of accounting firms essential to address audit risks
Big 4 "Introducing and developing AI audit platforms... Catching human errors to improve audit quality"

As OpenAI's ChatGPT gains attention, interest in the use of artificial intelligence (AI) in specialized fields is also growing. The accounting sector is no exception. The domestic accounting firms known as the 'Big 4' (Samil PwC, Samjong KPMG, Deloitte Anjin, EY Hanyoung) are competing to develop and implement digital audit tools equipped with AI, thereby ushering in a full-fledged era of 'Digital Audit.' Strengthening digital audit capabilities is essential to establish an efficient audit system to counter increasingly sophisticated accounting fraud. Regulatory authorities especially anticipate a rise in accounting fraud during economic downturns and are urging the accounting industry to respond accordingly.

73% of Accounting Fraud Perpetrators Are Executives, 27% Are General Employees

According to an analysis by the Financial Supervisory Service (FSS) on 22 cases of accounting fraud detected by auditors during external audits over the past three years, 73% of the fraud perpetrators were executives. General employees accounted for 27%. This is likely because executives are in a position that makes it easier to undermine internal controls. By type of fraud, there were 7 cases of financial statement misrepresentation and 15 cases of misrepresentation to conceal embezzlement. Included were cases where capital-less mergers and acquisitions (M&A) groups embezzled funds raised through rights offerings or convertible bonds (CB) after acquiring listed companies and concealed this by falsely recording loans and other items.

Most fraud risk factors were detected through auditors' analytical reviews (15 cases, 68%). Analytical review involves evaluating financial information by analyzing plausible relationships between financial and non-financial data, including trend and ratio analyses. This was followed by external whistleblowing (3 cases), company self-investigation (1 case), and litigation review (1 case). An FSS official emphasized, "To efficiently respond to audit risks such as auditor shortages, complex transactions like internet commerce, and increasing fraudulent transactions, it is necessary to strengthen digital audit capabilities."

Detecting Risks and Reducing Audit Time with Digital Audit Tools

Accounting firms have been focusing on strengthening digital audit capabilities for several years to improve work efficiency. They believe that efficiency gains from digital audits will drive the overall quality of audits in the accounting industry.

Accounting firms utilize AI technology in various areas such as data analysis, fraud detection, and risk assessment. The biggest advantage of digital audits is the ability to proactively assess risks and automate simple repetitive tasks, saving time. This allows auditors to focus more on complex and careful judgments, thereby improving audit quality.

172,000 hours. This is the amount of work time saved last year by Samil PwC using its self-developed digital audit program. They saved 108,000 hours in 2020 and 148,608 hours in 2021. This was made possible by Samil's audit automation service called the 'Robotic Platform.' This tool includes over 30 automated applications such as automatic verification of accounting information, drafting reports and working papers, and searching disclosure information. Representative applications include 'Business Status Inquiry,' which checks business status on the National Tax Service's Hometax website and provides results and evidence; 'Smart Lease,' which automatically calculates amortization schedules for lease accounting when entering lease contract terms; and 'Customs Electronic Clearance System Inquiry,' which verifies export/import compliance documents and facts. Seunghwan Lee, partner in charge of the Robotic Platform, said, "Automating calculations and repetitive tasks in accounting work not only reduces human errors and improves data accuracy but also allows saved time to be invested in important audit procedures."

How much can large data volumes be shortened? Deloitte Anjin operates a data analysis team and has developed a large-scale sampling solution applied in their work. Sampling methods that typically took about a week are now completed in just a few minutes. Anjin explained, "For large data volumes, data extraction was previously impossible or took over a week, but by utilizing IT technology, we have reduced it to within an hour."

During the COVID-19 pandemic, when remote audits were inevitable, digital audits proved invaluable. EY Hanyoung's audit platform, EY Canvas, is an example. Based on an online integrated platform, it allows real-time monitoring of audit progress. A Hanyoung representative said, "EY Canvas, linked with EY CCP (Canvas Client Portal), is a two-way communication tool that enables audit teams and clients to easily request and submit documents, making it efficient in a remote audit environment. Especially, once an audit request list and details are created, they are automatically carried over to the next year, allowing consistent work even if the person in charge changes."

Can AI detect anomalies and also provide advice necessary for decision-making? It can. Samjong KPMG has introduced KPMG's Clara and uses the audit procedure automation tool 'DataSnipper' to perform predictive analytics that assess business outlook and risks. It evaluates audit procedures and informs auditors whether sufficient audit evidence has been obtained, providing necessary decision-making support during the audit process. It also automatically identifies abnormal accounts and high-risk transactions. PwC's Aura (Audit Risk Assessment), adopted by Samil, supports work based on risk assessment according to international auditing standards.

There are also solutions designed to help auditors conveniently detect fraud-related anomalies in company ledgers. Anjin uses Excel JET, which reduces anomaly detection time from about three days to one day per task. They also utilize an evaluation report support solution that quickly and automatically digitizes external evaluation reports, verifies variables in evaluation reports using external data, and checks for anomalies. While related tasks took about two days for audit teams, this solution reduces it to within four hours. EY Canvas's audit analysis platform, EY Helix, also analyzes unusual transactions in cash accounts to detect signs of cash-related fraud.

The Clara-based AITS (AI Transaction Scoring) tool evaluates risks on full voucher data using 13 risk factors such as anomaly detection, rating them as low, medium, or high risk by an AI engine. Han Eunseop, head of Samjong KPMG's audit division, explained, "When testing with 8 million vouchers as sample data, traditional amount-based sampling identified 370 cases, whereas the AITS tool reduced this to 28 cases, improving audit efficiency."

Embezzlement Prevention Solutions Emerge... AI Labs Established

AI technology in the accounting industry is advancing daily. Recently, embezzlement prevention solutions have appeared. As various industries such as medical devices, finance, telecommunications, cosmetics, and food experience numerous embezzlement incidents, corporate executives and shareholders are increasingly interested in strengthening and preventing internal control system failures.

Deloitte Anjin introduced 'Lighthouse,' a solution that combines data analysis technology with audit expertise to diagnose and detect signs of financial incidents. The operating principle of Lighthouse is to analyze corporate accounting information to detect the most frequent types of embezzlement cases domestically and internationally, identifying abnormal signs in cash flow. Notably, Lighthouse operates using both internal data and verified external data from institutions such as the National Tax Service to increase detection rates. Seungyoung Lee, senior auditor at Deloitte Anjin's audit headquarters, said, "Lighthouse is efficient not only in diagnosing, detecting, and preventing incident anomalies but also excels in visualization features such as tables and graphs."

Investment in AI technology development is also increasing. Samil plans to fully operate a lab that integrates digital and AI innovation projects for research. Samil stated, "We plan to focus on realizing advanced work automation such as knowledge-based linked services and advanced chatbots using AI and digital technologies, as well as developing additional service models utilizing machine learning and AI." A Hanyoung representative said, "Globally, EY is actively investing $1 billion in audit platforms applying AI technology, demonstrating strong commitment to digital audits."

Samjong is developing the FSS (Financial Statement Suite), an automated tool for verifying report totals, aiming for launch in September this year. FSS automates repetitive tasks related to report footing, reducing workload and improving efficiency. It will feature functions to verify totals for accuracy and provide review histories such as comparing notes and figures between previous and current reports. Han Eunseop said, "We are automating simple repetitive tasks to enhance the effectiveness and efficiency of audits."