How algorithms are changing the way companies handle fraud
Human auditors aren’t redundant just yet but technology has stepped up to lend a helping hand
An employee travelling for work checked his dog into a kennel and billed it to his boss as a hotel expense. Another charged yoga classes to the corporate credit card as client entertainment. A third, after racking up a small fortune at a strip club, submitted the expense as a steakhouse business dinner.
These bogus expenses, which occurred recently at major US companies, have one thing in common: all were exposed by artificial intelligence (AI) algorithms that can in a matter of seconds sniff out fraudulent claims and forged receipts that are often undetectable to human auditors — certainly not without hours of tedious labour.
AppZen, an AI accounting start-up launched 18 months ago, has already signed up several big companies, including Amazon, IBM, Salesforce and Comcast, and claims to have saved its clients $40m in fraudulent expenses. AppZen and traditional firms such as Oversight Systems say their technology is not erasing jobs — so far — but rather freeing up auditors to dig deeper into dubious claims and educate employees about travel and expense policies.
“People don’t have time to look at every expense item,” says AppZen CEO Anant Kale. “We wanted to get AI to do it for them and to find things the human eye might miss.”
US companies, fearing damage to their reputations, are loath to acknowledge publicly how much money they lose each year to fraudulent expenses. But in a report released in April, the Association of Certified Fraud Examiners said it had analysed 2,700 fraud cases from January 2016 to October 2017 that resulted in losses of $7bn.
The world’s largest antifraud organisation found travel and expense embezzlement typically accounts for about 14% of employee fraud. It has become easier to fool finance departments thanks to websites such as fakereceipts.us that make it easy to create a bogus paper trail.
For years, forensic accountants such as Tiffany Couch, the founder of Acuity Forensics, have had to do the sleuthing one receipt at a time. In one case, she exposed $1.4m worth of fabricated receipts; and Couch also outed three car parts executives who claimed thousands of dollars of expenses after a decadent trip to Canada with their wives.
However, despite such successes, she says the advent of artificial intelligence is long overdue. “It’s an auditor’s worst nightmare to go through expense-claim reimbursement,” she says.
Kale, who has a background in finance and technology, created AppZen after discovering how antiquated back-office expense systems had become. Only about 20% of claims were being scrutinised and in most cases auditors were just trying to match the amount on a receipt to the expense submitted, he says.
AppZen, based in California, can audit 100% of claims in real-time by running receipts through an algorithm that hunts for duplication, discrepancies or inflated expenses. It reimburses legitimate employee expenses on the same day and kicks back any dubious claims to human auditors for further investigation.
The algorithm can compare the average cost of a flight from New York to Chicago against the amount claimed and will flag it if the price seems exorbitant for that day (or if the employee upgraded a flight to first class). It will also sound an alarm if a company listed on a receipt doesn’t exist or if a strip club is masquerading as a steakhouse.
The algorithms have exposed some creative — and costly — frauds: employees tacking on bottles of vodka to their “work lunch” bill, buying $3,000 worth of Starbucks gift cards and claiming it as “coffee with a contact”. One employee claimed $900 for her office farewell party and submitted an animated photograph of her face instead of any receipts — demonstrating how seriously she took the auditors.
The algorithms have exposed some creative — and costly — frauds: employees tacking on bottles of vodka to their ‘work lunch’ bill, buying $3,000 worth of Starbucks gift cards and claiming it as ‘coffee with a contact’.
A number of Indian tech companies, including Wipro, have started offering AI-based fraud detection services similar to the one offered by AppZen.
Oversight Systems, based in Atlanta, began using an early version of AI several years ago and its machine learning technologies now make it possible to scrutinise millions of transactions in real time.
According to Oversight, 30% of employee expense claims are risky, wasteful and potentially fraudulent. “You’ll be amazed at what people will try and do,” says CEO Terrence McCrossan.
Guido van Drunen, a principal at KPMG’s forensic advisory services, believes some lower-level jobs will disappear as more companies adopt the technology. But he says AI can’t spot all the sneaky ways employees try to defraud their employers.
He recalls being called in after an employee claimed for a live python. “Everyone was jumping up and down saying it was a fraud,” he says. Upon further investigation, Van Drunen discovered the person worked in sales and had bought the snake as a marketing ploy for the launch of a product called Python.
While the snake could be justified, the employee’s purchase of $1,200 worth of steak as snake food could not. Pythons only consume live prey. “The python was a legitimate business purchase,” Van Drunen says. “But the steak was for his family barbecues.”