Email: hamish@transparently.ai
Regulators and exchanges are increasingly focussed on the costs associated with accounting fraud. As regulators improve their fraud detection it will be imperative for investors to employ sophisticated tools of their own to stay ahead of the curve.
The direct cost of accounting fraud is estimated to run to trillions of US dollars every year.
Also significant, are the indirect costs associated with enforcement and prosecution. Externalities linked to fraudulent behaviour are probably even larger. An exchange with a reputation for fraudulent companies will find it increasingly difficult to attract investors and quality listings. Bad money, as they say, drives out good.
As a consequence, exchanges and regulators have begun investing in fraud detection technologies. These technologies can be invasive or non-invasive.
… invasive technology scours encrypted cyberspace to uncover relationships that might reveal illegal activity
The invasive approach was pioneered in the US by Palantir Technologies Inc. and other big data analytics firms. While these companies collect information from public sources, they mostly rely on invasive technology to scour the deep web and the dark web to uncover relationships that might point to illegal activity. They can, for example, trace relationships or payments to find a company’s ultimate owners.
US law enforcement and spy agencies make extensive use of companies like Palantir, as do departments with big data needs such as healthcare and welfare services.
The Shenzhen Stock Exchange is presently testing the technology of EC Guard to uncover fraud and to vet listings. EC Guard is China’s equivalent of Palantir and has filed for a Shenzhen listing.
While invasive spy technology is highly effective its use in non-defence applications is subject to increasing criticism. In Europe, for instance, Palantir is experiencing increasing pushback due to privacy concerns.
The UK government ran its Covid vaccinations on Palantir’s platform and the company was in the running for a £400mn contract to manage more NHS data. However, the NHS was forced to break the contract into smaller units in response to protests about privacy concerns.
Privacy concerns will, we feel, increasingly restrict the use of invasive tech applications in democratic countries.
Privacy concerns will, we feel, increasingly restrict the use of invasive tech applications in democratic countries. Non-invasive approaches, such as that employed by transparently.AI, apply data analytics only to data in the public domain. There is no privacy concern. This likely explains why the SEC has opted for a non-invasive approach.
In its EPS Initiative the SEC has begun using data-driven analytics to identify companies with high risk of earnings manipulation. To date the EPS Initiative has resulted in the SEC filing cases against six companies and an even larger number of company officers.
As regulators improve their fraud detection it will be imperative for investors to employ their own detection tools to stay ahead of the game.
With the modern emphasis on ESG, companies subject to any kind of castigation from regulators become untouchable to most investors. As regulators improve their fraud detection it will be imperative for investors to employ increasingly sophisticated tools of their own to stay ahead of the game. transparently.AI is at your service.
