The impact of forensic data analytics on corporate governance
Forget Bitcoin. Data is the real digital currency of the future, and organisations that can effectively leverage the information they possess have a distinct competitive advantage over their rivals.
Analytics is the process by which businesses gain these insights, and with 2.5 quintillion bytes of data created every day, there’s an abundance of information to interpret.
One area where organisations are keen to exploit data analytics is fraud. Last year, Britain’s households and businesses lost £1 billion to fraudsters, according to UK Finance.
The industry managed to stop £1.4 billion worth of potential fraud in 2017, but financial institutions (FIs) want to lower this figure even further, given that they are often responsible for refunding scam victims.
Financial data analytics (FDA) is helping businesses win the war against fraud. But what effect is the technology having on corporate governance departments that must deal with the fallout of criminal activities?
What is FDA and how does it work?
FDA is a branch of analytics that deals specifically with fraudulent activity. EY defines the practice as the collection and analysis of data in order to manage legal, compliance and fraud risks.
This form of analytics takes advantage of developments in artificial intelligence, machine learning and robotic process automation to detect, prevent and review fraudulent activities across various transactions.
A 2018 EY report showed FDA spending has increased 51 per cent since 2016 among organisations already using the technology. Clearly, existing adopters have confidence in the results so far and are investing further.
“In today’s fast-changing digital world, companies have ever-evolving risk profiles,” said Carl Judge, a partner at the Big Four firm.
“Forensic data analytics gives them the opportunity to move from a reactive strategy – where the past dictates how companies define their compliance and risk programs – to a forward-looking strategy, through which they can plan for enhanced prevention and mitigation activities.”
How are businesses currently using FDA?
FDA is bringing significant benefits to adopters worldwide, with businesses using analytics to deliver results across multiple areas. According to EY, the top five reasons for implementing FDA processes are:
- Improve risk assessments (88 per cent);
- Detect risk in large datasets (87 per cent);
- Respond quicker in fraud investigations (81 per cent);
- To enhance corrective actions and training (80 per cent); and
- Meet regulatory expectations (79 per cent).
Other commonly cited advantages of FDA are better business transparency (74 per cent) and more cost-effective risk management programs (55 per cent).
Firms also appear pleased with the outcomes from their analytics projects. Some 81 per cent of respondents claimed FDA was effective at managing internal investigation risk, while 77 per cent said the same about financial statement fraud.
The technology was lauded across a number of other fraud-based activities. Between two-thirds and three-quarters of businesses said FDA was effective at tackling risk across money laundering; data protection and privacy compliance; cyber breach and insider threats; and bribery and corruption.
The challenges FDA users face
FDA adoption is gaining momentum and shows no signs of slowing down. In the four years since EY began tracking the technology, more businesses have begun utilising FDA and those that were already invested have matured significantly.
But challenges remain for those keen to deliver data analytics results that support a real-time fraud identification and prevention strategy.
Lack of management buy-in: A sizeable 45 per cent of respondents to the EY survey said senior management need to be better informed about the benefits of FDA. This figure has doubled in recent years.
Poor stakeholder engagement: FDA stakeholders cover a broad base, many of which operate in silos. Cross-department collaboration between risk management functions needs to improve to optimise analytics usage.
Data difficulties: Garbage in, garbage out is a well-known expression in computing, and many organisations are struggling to obtain globally consistent datasets to deliver the best insights through analytics.
A shortage of skills: Only 13 per cent of FDA-using firms said they currently have people with the necessary skills to take full advantage of the technology. Just 12 per cent claimed they were confident in their data analytics and data science capabilities.
The bottom line for FDA
Organisations are seeing positive FDA results across a number of corporate governance functions, with this form of analytics shown to be effective at fraud identification, prevention and monitoring.
But businesses face various challenges when trying to leverage FDA to maximum effect, particularly as technologies continue to evolve at a rapid pace and relevant skills are increasingly hard to find.
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