AI Can Find Audit Frauds – EY

• Blockchain Council
• December 05, 2023

In a groundbreaking move, Ernst & Young (EY), one of the world’s leading professional services firms, has embraced artificial intelligence (AI) to revolutionize its audit processes, achieving significant success in detecting fraudulent activities. This transformative integration of AI into financial professions holds promise for reshaping the industry’s landscape and ensuring more robust audit practices.

Richard Jackson, EY’s assurance partner, a veteran with a career dating back to the 1990s at the firm, expressed his conviction that the next five to ten years would witness more substantial changes in the profession than the preceding century. Jackson emphasized the strategic use of technology to enhance efficiency without replacing human roles. He outlined the firm’s commitment to empowering auditors by providing them with intelligent tools to improve their decision-making processes during audits.

The core of EY’s AI-driven audit process lies in its proprietary application, EY Canvas, developed in collaboration with Microsoft. This innovative tool allows auditors to create a unified audit plan across global teams, providing real-time monitoring and flexibility for quick adjustments. Jackson underscored the importance of using technology to augment auditors’ capabilities, focusing on facilitating better judgment, application of experience, and the utilization of knowledge and expertise.

EY Canvas, described by Jackson as bringing “intelligence and insights around your client, your industry, [and] your peers to the hands of the auditor,” stands as a testament to EY’s commitment to leveraging AI for the benefit of auditors and the broader financial industry. The application captures a wide range of public information, including short sell reports, compiling them to provide auditors with a comprehensive view during the audit scope and risk assessment.

The effectiveness of EY’s AI integration is evident in its ability to analyze vast amounts of data, enabling auditors to move beyond traditional methods reliant on small or random samples. Jackson highlighted the increased speed at which EY can now detect fraud in more sophisticated ways than human auditors working with limited data sets. The technology’s success is reflected in its early deployment, where suspicious activities were identified in two out of the first ten companies evaluated, subsequently confirmed as instances of fraud by the clients.

EY’s shift towards total population data analysis represents a paradigm shift in audit methodologies. Moving away from the traditional approach of selecting small samples, EY now captures comprehensive data from clients’ Enterprise Resource Planning (ERP) systems, finance systems, and operations. This advancement allows auditors to analyze tens or hundreds of millions of records, providing a more accurate understanding of normal transactions and making it easier to identify irregularities that might indicate fraudulent activities.

To address skepticism within the industry, EY chose transparency, sharing early results of its AI system detecting suspicious activities. While specifics about the software or the nature of the detected frauds remain undisclosed, the acknowledgment of success in two out of the first ten evaluations adds credibility to the potential of AI in auditing.

Despite the promising outlook, the industry’s response to AI in auditing is mixed. Some express concerns about the technology’s ability to reliably detect diverse forms of fraud, while others see it as a valuable tool that, when used appropriately, can enhance audit quality and efficiency.

Regulatory bodies, including the UK’s Financial Reporting Council, acknowledge the potential benefits of AI in audits but stress the importance of auditors possessing the skills to critique AI systems. Jason Bradley, head of assurance technology for the Financial Reporting Council, emphasized that auditors must ensure the accurate use of AI outputs and deploy tools in a standards-compliant manner as AI usage grows.

As AI continues to evolve within the financial sector, several challenges emerge. Data privacy, seamless integration into existing auditing systems, and the need for continuous monitoring and updating of AI algorithms to keep pace with emerging threats are among the key considerations.

The success of EY’s experiment with AI in auditing suggests a transformative potential for the financial industry. EY’s commitment to continuous improvement is evident as it tests and refines the capabilities of its AI-assisted tools. Industry-wide discussions on the best practices, challenges, and regulatory frameworks for incorporating AI into audits are ongoing, reflecting the evolving nature of financial professions in the digital era.

EY’s pioneering use of AI in audit processes marks a significant milestone in reshaping financial professions. The success in detecting fraudulent activities underscores the potential benefits of AI, while industry discussions continue on the best practices, challenges, and the regulatory framework for incorporating AI into auditing. EY’s commitment to transparency and continuous improvement positions it as a frontrunner in leveraging AI for the betterment of the financial industry.