Could an AI Auditor have Caught Bernie Madoff?

Solon Angel, founder of AI auditing company MindBridge Ai, is on a mission to weed out corruption. And he sees accountants as key allies in this fight.

“Accountants have a very high responsibility to preserve trust in business. It is the highest responsibility in capitalism,” Angel said in an interview in his first visit to Australia.

Angel’s idealism is deeply personal. His family’s wealth was “decimated” by a fraud perpetrated by a past CEO and accountant of the family company.

Angel’s home country of Brazil has also struggled with rampant corruption. A major case that began in 2014 swelled to encompass past and sitting presidents. The BBC has a page dedicated to “Brazilian corruption scandals: All you need to know”.

MindBridge’s Ai Auditor software originally created to assist in detecting fraudulent activity for audit purposes can also be used more broadly for risk management. It combines artificial intelligence and machine learning with more conventional data science techniques to produce a ‘risk score’ of each data point allowing anomalies to be easily identified.

The Ai Auditor produces a dashboard of results identifying potentially anomalous data. A user can drill down into each variable and view its development over time both in isolation and in comparison across peer firms to understand whether the driver was firm specific or industry-wide, wrote the Bank Of England in a test review of the software.

The bank listed the following advantages:

The tool combined statistical techniques, specific rules set by the user and machine learning, consolidating information both for individual businesses but also for the wider peer group.

It included a useful workflow feature, which allowed the user to flag items as suspicious or safe, hence permitting the program to ‘learn’ from the user which items could be of potentially more interest. MindBridge demonstrated this functionality with a scenario that exhibited how the program adjusted its risk scores weighted by the user’s priorities.

The startup is barely a year old yet it is already making millions in revenue, has over 120 customers worldwide and is preparing for an IPO in 2021.

Angel’s favourite selling tactic with accounting firms is what he calls the Pepsi Challenge. In his most recent meeting, a firm produced an audited file with four known issues. MindBridge’s AI Auditor not only found the four issues but it discovered a fifth – which, after investigation, turned out to be legitimate.

The punchline is that the software took minutes to find the five issues. The firm had employed five staff for three weeks for a lesser result.

It’s a breakthrough in techniques that is forcing “a once in a lifetime refresh of all the tools in accounting,” Angel says. With AI, “the whole stack changes.”

Radlee Moller, managing partner and audit partner of CIB Accountants & Advisers, a DFK International firm, can confirm the software’s speed. “It took 12 minutes for our biggest file,” Moller says. “I sat there and timed it.”

Moller saw Angel present at the DFK Network retreat in Hawaii, and chased down an arrangement to distribute the MindBridge Ai Auditor in Australia. CIB is a Xero Platinum firm although it runs a centralised ledger on server-based practice management software.

Auditors can’t work that fast with the same accuracy, Moller says. Using the software also reduces the risk of being sued for missing issues.

“If I was doing standard rules-based questions it would be easily a day to run through a file,” Moller says.

CIB began using MindBridge AI Auditor in October and is gradually rolling it out across all clients. Staff were initially hesitant at trying something new but clients are wowed by the technology, Moller says. MindBridge was an opportunity to make the firm “look really cool”, help recruit younger staff and compete with the big guys, Moller adds.

Despite the increase in speed, CIB isn’t dropping its fees. “I tell clients there’s a software cost. We don’t pass that on, we wear it,” Moller says.

Angel is keen to sell the software into government and universities – two countries in the G7 have already signed on. Fraud in government is the second highest category after construction. A lot of fraud goes undetected, and even when it is exposed white-collar criminals often go unpunished.

As for Bernie Madoff? Angel is adamant a serial fraudster would be impossible in a world with AI in the hands of auditors. “The accountants missed it because they were not data scientists.”

Image credit: Kinja