Fraud in annual financial statements is making the headlines again and again in the current period. The question arises as to how this could remain undetected, even though the financial accounting was examined by auditing firms.
It is often very difficult to recognise or prove fraudulent behaviour on the part of companies. Time and again, there are companies that make the headlines after years of fraud have been uncovered, despite supposedly correct accounting. Even renowned auditing firms have confirmed that the accounting is formally correct. In most cases, the insolvency of the company also becomes known at the same time.
The best-known example from the recent past in Germany is Wirecard, which has since been promoted to the DAX. In 2020, it became known that the management falsified the balance sheets for years and ended up with a shortfall of around 1.9 billion euros. Despite this enormous shortfall, the balance sheets and profit and loss accounts were assessed as correct by the auditors.
In such cases, the damage caused by fraud has two effects: On the one hand, the shareholders or stockholders of the company concerned, as well as companies and persons who have outstanding claims against the company, are harmed. Secondly, competing companies suffer a competitive disadvantage. The greatest damage, however, is done to the reputation of the auditing firm that falsely assessed the books as correct.
But proving fraud in annual financial statements is not trivial. After all, the fraud is perpetrated by a person or a small group of people who have in-depth knowledge, often including knowledge of audit procedures. Nevertheless, it is possible to detect signs of fraud even in an annual financial statement report that has been assessed as formally correct – using modern AI methods.
In the next article, I will explain which AI procedures can be considered for fraud detection in financial statements.
