Artificial brains to stop fraud

Audits of the big corporations are about to go through a revolution to cope with a phenomenal growth in use of the Internet for business-to- business transactions. That is increasing the risk of hackers and internal fraud, forcing auditors to become experts in data encryption, "firewalls" and on-line identity authentication.

Using computers as devices to communicate rather than simply to process data creates new challenges, and the big accountancy firms are devoting more resources to helping clients to improve their protection against computer fraud.

"Technology has not kept pace with the desire of business to use the technology," says Pat Russell, a partner in information systems risk management at Price Waterhouse. "We are working with clients to ensure that they are dealing with the person they think they are dealing with."

Medium-sized firms could be squeezed as a result of these new demands on auditors, suggests Clive Holtham, Bull Information Systems professor of information management at the City University, London, who is heading a research project on IT and the future of the audit. Small firms servicing small clients in traditional trading sectors will not be greatly affected by electronic commerce, he says, but larger firms, outside the big six, may struggle to meet the demands of clients committed to new technology, especially those operating multinationally.

Professor Holtham adds, though, that basic audit skills are as relevant as they have ever been. "Auditors continually emphasise that controls are their stock-in-trade," Professor Holtham says. "New technology will not change that.

Banks, insurers and the major retailing corporations are making strides not only in developing electronic commerce, but also in using "artificial intelligence" (AI) - where software uses evidence to make deductions or produce warnings - to strengthen their marketing and audit internally management controls and computer security.

AI is also being used by the big firms to check unauthorised access to confidential information. Forensic auditors use AI not only to analyse how a fraud has taken place, but also to detect it in action, and pre- empt it by locating control weaknesses. Effective AI software at Barings should have warned managers and auditors of what Nick Leeson was doing.

There are limits, though, to the use of AI as a substitute for old-fashioned, good quality auditing. Some auditors say there are simply too many transactions taking place in a large corporation for each to be analysed by computer.

AI should, though, prove useful in enabling auditors to benchmark clients against competitors, helping them to identify where a corporation is under-performing. John Mulholland, a senior manager at KPMG's audit research and development division, says that computer benchmarking is something to be gradually introduced into client audits. "Clients do appreciate a comparison," he says.

"Spider's web" diagrams can compress maybe 10 complex tables into a single graphic display: executives can see at a glance in which areas of activity their corporation under-performs against competitors. "People are much better at viewing patterns than reading tables," Mr Mulholland points out. But he adds: "The role of computers is to supply information so that people can bring their judgement to bear on the scenario. The main audit tool is still the brain"

Paul Gosling

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

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