Automated accounting software could be the way forward for accountancy firms seeking to stamp out corruption
Robots searching financial statements for fraud ' sounds like a Stanley Kubrick movie, doesn't it? But with audit fees rising, chief executive officers taking more responsibility for financial statements, and companies revealing billion-dollar revisions, the need for such 'auditbots'' is becoming essential.
Professor Robert Jensen, who teaches information systems at Trinity University in San Antonio said there are 'more than enough incentives'' for accounting firms and companies to create automated auditing aids using current technology.
'Software that permits database systems to talk to each other currently flows between companies, and auditbots can make it difficult if not impossible for companies to alter or eliminate key financial data,'' Jensen said. He envisions cyber tags, like the ones that department stores remove from clothing after payment, being attached to individual transactions that cannot be removed and which automatically spot attempts to cook the books.
Auditbots would have spelled out the $7.1bn in accounting irregularities of WorldCom long before they were revealed during the past two months, Jensen said.
The second-largest long-distance company admitted it improperly capitalised this huge amount, which it should have immediately deducted in its annual reports of 2000, 2001 and the first quarter of this year. 'The software would have attached a tag to each transaction involving costs that would have forced its reporting systems to spell them out in proper fashion rather than hide them,'' the professor said. What would it take to create and enforce a system of auditbots? Jensen believes that in the next five to 10 years the business world and accounting firms will be forced to develop much better automated systems for auditing.
'And these systems could be mandated by Congress and accounting regulators as they become aware of these systems,'' he said. Miklos Vasarhelyi, professor of accounting information systems at Rutgers University in Newark, New Jersey, said auditbots are already being used with corporate foreign currency transfers, for on-line securities trading on Wall Street, and by AT&T Corp. for fraud detection in its billing systems. 'Worldwide and industrywide use could be just around the corner,'' said Vasarhelyi, a leader in development of continuous auditing for business and the accounting profession.
Douglas Carmichael, an accounting professor at City University of New York's Baruch College and former head of auditing for the American Institute of CPAs, said that while such auditbots wouldn't be failsafe, they might reduce the huge expense for forensic accounting work, which can reach 10,000 hours, by as much as 25%. Ingenious crooks could still figure out ways to get around such tags, but they would help uncover fraud more quickly, Carmichael said.
In their book, Building Public Trust: the Future of Corporate Reporting,' Samuel A. DiPiazza Jr., CEO of accounting firm PricewaterhouseCoopers, and Robert G. Eccles, president of Advisory Capital Partners and a former professor at the Harvard Business School, discuss automatic systems that tag financial information.
The most significant one they described is XBRL (extensible business reporting language), a dialect of XML (extensible markup language), a new Internet language that defines and names data.
The World Wide Web Consortium recommended XML as a standard for internet-based information as far back as early 1998.
As the authors describe it, XBRL would transmit $5 million from one computer to another and automatically put it in a predefined revenue bin. With XBRL, this figure would be tagged as follows: 'This number is revenues, as defined by Global GAAP number XX, measured in U.S. dollars for specified period of time for this company.'' The book notes that Australian regulators use XBRL for a corporate reporting supply chain and that regulated banks in Australia must provide data to the regulators on this basis.
In Britain, the Inland Revenue Service has decided to use a similar format for corporate income tax returns starting next year as part of its foundation for electronic filing. And the Federal Deposit Insurance Corp. in the US is exploring a similar system to regulate financial service reports.
Professor Jensen said that a consortium of large software and software-service companies as well as energy firms are working with the American Institute of CPAs to use XML as part of XBRL to report financial data in information flows between companies 'will eventually be possible to trace transactions from suppliers and vendors to companies so that every invoice will be tagged for discovery by auditors and others seeking to unearth fraud,'' he said.
Even the most complicated derivatives in which assets or transactions are embedded will be a lot easier to find, according to Jensen.
Bloomberg newsroom, New York
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