In a rapidly changing business landscape, one thing that remains constant is the element of fraud. Financial fraud in the business world takes many forms; the hardest to detect and costliest being financial statement fraud.
Simply put, financial statement fraud occurs when companies attempt to appear more profitable than they are by falsifying their financial statements. Such fraudulent activities can have disastrous consequences for potential investors. Fortunately, an innovative use of technology can come to the rescue in this scenario to nip emerging financial scams in the bud by implementing thorough fraud detection techniques.
Balance sheet account reconciliation (BSAR) is one of the ways that companies have deployed to guard against the ever-present problem of fraud. With the advent of the digital transformation of financial practices, even the reconciliation process can be automated, reducing human intervention and providing assurance of impeccable bookkeeping.
The threat of misrepresentation
According to a global survey conducted by the Association of Certified Fraud Examiners (ACFE) in 2020, financial statement fraud is the rarest form of fraud, detected in only 10% of cases. When detected, however, reporting fraud is the most impactful fraud, with a median loss of $954,000. In contrast, the most prevalent type of fraud, asset misappropriation, accounted for 85% of all cases with a median loss of just $100,000.
Inflating earnings, overstating the net worth of an asset, concealing/undermining liabilities or relevant transactions in official company statements is tantamount to fraudulent financial reporting. Some potential red flags while detecting such fraud could be anomalies in account statements, a definite upward trend in earnings as competitors struggle to break even, improper non-GAAP accounting practices (Generally Accepted Accounting Principles), such as failure to adhere to consistent standards of reporting each financial period, a significant increase in sales during a financial year, and poor internal governance.
Last line of defense
Financial fraud is not a daily occurrence, a company must be vigilant to track any suspicious activity as soon as it appears in its books of accounts. Organizations should be proactive in their approach to detecting unwanted activity and alerting authorities if the need arises. This can be accomplished through structured audit activities such as BSAR.
BSARs are the last line of defense for companies to ensure the validity of the figures quoted in the financial statements. He plays a crucial role in reducing risk to the business by verifying the accuracy of the balance sheet, comparing documents to corroborate figures, and explaining internal or external discrepancies, if any. Accurate tax reporting, exclusion of identity theft and security against embezzlement are the other benefits of BSAR business at regular intervals for any organization. Increased reliability due to such closeness in turn contributes to better business decisions and regulatory compliance. Strict adherence to best practices in corporate management and governance policies enables organizations to eliminate the risk of fraud. Companies should have set policies for bookkeeping, account categorization, periodic overview of high-risk accounts and cash flows, and undertake accounting in accordance with GAAP to ensure quality and compliance.
While companies strive to implement internal audits to detect red flags, most of these methods remain manual to this day. The larger the size of the company, the more the manual task of internal control and audit becomes gigantic. This is where digital transformation comes in to ensure that a company’s financial statements are tamper-proof and compliant in a faster and error-free way.
Automated reconciliation is the answer
In today’s information-driven business environment, with complex and dynamic business processes and systems, it is extremely difficult to detect false financial reports. Additionally, manual reconciliations can lead to faulty record keeping, inefficient operations, and duplication of effort and cost.
BSAR’s end-to-end automation through RPA, AI, and ML has the potential to change the face of reconciliation for organizations. Integrating such a solution with any enterprise ERP system can pave the way for live data transfer and autonomous operation. Such a tool also has the potential to house company data in the cloud, making information accessible to all parties involved and ensuring transparency. The integration of an automated reconciliation solution can thus facilitate the identification and resolution of bottlenecks, the simplification of operations, the optimization of efforts and long-term costs, and the unification of data between systems, complete accuracy and provide a single source of truth for all stakeholders. It enables the standardization of processes as well as the supervision and prioritization of key accounts, leading to the delivery of real-time information and analysis, thus benefiting the company’s strategic decision-making.
Automated BSAR is here to stay and enable businesses to combat fraudulent reporting and financial manipulation. It holds the future of compliant accounting practices and can drive the shift from risky to risk-free auditing for businesses.
Senior Practice Leader – M&A, Infosys BPM
A Chartered Accountant (CA), Cost Management Accountant (CMA) and Chartered Forensic Accountant (ICAI) with over 17 years of experience in different roles, Abhishek has gained diverse experience in the financial industry managing operations and transitions end to end. , and transformations. In his current role as Practice Leader for Finance and Accounts at Infosys BPM, Abhishek is responsible for managing M&A transformations, implementing industry best practices, global financial solutions, in addition to supporting operations. .
Deep Raman Kedia
AVP, Infosys BPM
Chartered Accountant with over 18 years of experience in the core areas of finance, analytics, compliance and reporting, and has played a pivotal role in Fortune-rated companies in the areas of FMCG, IT, hedge funds, private equity and housing finance. In his current role at Infosys BPM as Head of Finance & Accounting, Raman is responsible for developing global finance solutions for multinational clients, improving the digitalization of the function by combining state-of-the-art tools and processes functional, and driving structural change. to deliver operational cost reduction, while helping to solve business challenges.