Category Archives: Governance

Managing Disruption

Technology risks are evolving and changing so rapidly, it’s more difficult for management to assess new fraud threats and to adjust its strategies to manage and mitigate them. Applications that use disruptive technologies, such as artificial intelligence, advanced robotics, 3D printing, blockchain, and the Internet of Things, are being designed quickly and often generate new high-growth markets. CFEs and other anti-fraud professionals are struggling to stay abreast of the most recent developments and to identify anti-fraud policies, procedures and controls that add value.  Additionally, the exponential growth of computing power has enabled our client organizations to capitalize on the use of mobile devices and to leverage the ubiquity of the internet to reach their markets almost instantly.

While this is an exciting and challenging opportunity for marketers and business managers, it has injected new risk considerations for CFEs. Digitalization of data has created opportunities for knowledgeable investigators to improve their use of data analytics, use algorithms to facilitate cognitive intelligence, and to even create bot applications that perform automated fraud assessment tasks in real time. The essence of the risks and controls involved has not changed as much as the underlying technology. The new processes still need to adhere to organizational policies and procedures, change management practices are still a vital component in transitioning to new tools and processes, and system and access controls must continue to be enforced. However, some controls that were important in the past now take on a new level of criticality. Automated algorithms result in less transparency of the underlying process. When data is used and shared through these processes, accuracy and completeness become a necessity. An organization needs very specific controls to ensure a bot does not proliferate erroneous data. Anti-fraud focused information security and access control processes must treat the bot as if it were a person and only allow it access to appropriate data. Checks and balances must be integrated into the process to ensure the results are accurate, service level agreements are met, and contracts remain faithfully performed.

Advanced materials, 3D printing, and autonomous vehicles are other advances that are transforming the fraud prevention landscape. New businesses created by these technologies need to follow established governance processes and design fraud and abuse risk management and related internal controls into their business processes. As entirely new markets and products are developed, it’s important that risk managers with fraud investigation experience are involved proactively from the first. This blog has devoted several recent posts to blockchain technology.  Blockchain is a distributed ledger that maintains a shared list of records. Each of these records contains time-stamped data that is encoded and linked to every other previous transaction in that chain of transactions. The decentralized and distributed storage of these records provides visibility to everyone in the network and ensures that no single entity can change any of the historical records. While blockchain is already being used in numerous applications, most notably digital currencies, many other industries are exploring the technology.  Banks are testing cross-border financial transactions, and there is much speculation about the potential to use blockchain to eliminate the middle man in real estate deals, routine contract management, stock purchases, and other similar transactions. If blockchain is effective at eliminating intermediaries, the new business model will expose all the transacting parties to new fraud risks, which were previously being addressed by the middle man.

There are several ways CFEs can proactively help manage the effect of the fraud related aspects of disruptive technologies on their client organizations. By focusing on anti-fraud assurance, providing fraud scenario insight to management, and by demonstrating proficiency and expertise in innovative technologies, fraud examiners will be able to contribute significantly to the overall fraud prevention programs of our client organizations.

For many years organizations have been encouraged by economists to focus on what they do best. That is wise advice for the fraud examination profession, as well. By continuing to focus on governance, fraud risk, and preventative controls, CFEs can help ensure fraud prevention policies and processes are designed and operating effectively. Regardless of the nature or tempo of the changes, investigators will then be able to more effectively fulfill their mission. Moreover, proactively helping their organizations anticipate emerging fraud risks and technological changes can position fraud examiners as authorities and better prepare client organizations to better respond to disruptive events.

By aligning with the expectations of the profession’s key client stakeholders and working closely with those subject-matter experts who are implementing disruptive technologies from within and without, CFEs can remain focused on the most relevant and significant fraud prevention related issues.  For example, cybersecurity and data privacy are topics that every organization is managing. Identifying trends that will affect the organization, and collaborating with and providing insight to their stakeholders, can enable the CFE community to significantly affect the business agenda.  More than ever, fraud examiners must constantly pursue training to learn about recent technologies and the complex and emerging new risks being introduced into their organizations.  Additionally, chief investigators need to focus on developing an adaptive, flexible, innovative staffing model. This new model must tap into a highly specialized talent pool that has the technological competence to rapidly understand and leverage new tools, techniques, and processes.  Perhaps the most important thing CFEs can do to prepare for disruptive technological innovations is to embrace and leverage new technologies in their own work. CFE investigators need to be at the forefront of adopting artificial intelligence, cognitive computing, and smart robots.

All assurance professionals need to completely understand how technologies like blockchain work and how they can be used and analyzed in fraud investigations.  They must take advantage of machine learning and data analytics in their examination processes. Moreover, continuous fraud auditing should be the standard default for new review routines and real-time identification of fraud signatures and red flags should be a requirement as organizations implement new business processes.

In summary, the threat of disruptive technologies has arrived and will affect every organization regardless of its size or objectives. When Gordon Moore observed in 1965 that the number of transistors on an integrated circuit had doubled every year since transistors were invented, few thought that exponential growth would continue for more than 50 years. As computing power increases, technology becomes more mobile, data becomes more accessible and usable, and fraudsters capitalize on the opportunities that arise. Fraud risk managers will have to assess emerging threats consistently and continuously. CFEs will need to respond to emerging threats with new and better ways to perform our investigations and engage to redesign our own processes or face disruption ourselves.