Through the pandemic many finance departments have operated remotely with less oversight than usual. As with any major crisis, this pandemic has created the perfect opportunity for fraudulent activity to thrive. Alongside this, over the past year, we’ve seen financial support and government loans handed out to struggling businesses with little or no accountability, with many of the initiatives, including the furlough scheme, now set to be extended until September 2021.
What’s more, some corporations have handed back their furlough grants following HMRC’s 90-day amnesty programme. However, many businesses are unable to calculate and understand the true scale of their exposure without rapid data-driven insight and risk stratification.
This therefore means many businesses face the scary possibility of repaying their loans when they pay their deferred VAT, during the early part of this year within a strained economic climate. Stuart Cobbe ACA, Director of Growth, Europe, MindBridge explains how crucial the auditor’s role has become in supporting businesses through the pandemic – and how AI and machine learning can enable firms to meet evolving industry standards and regulatory pressure as businesses strive to survive.
Audit’s role in providing data-driven and actionable insights
The Covid-19 landscape is fluid and ever-changing, and businesses require accurate visibility of all aspects of their business in order to plan effectively for the future and to understand their financial position. As the economy continues to recover to a new ‘normal’, companies need to focus on the next six months. How many ‘zombie’ businesses are only operating due to deferred VAT payments? How many companies will fail when they cannot repay loans? The role of the auditor is vital in unlocking this transparency to provide data-driven, actionable insights.
After all, there are many questions around how government financing has been used, from grants to loans, furlough payments to VAT deferments. For instance, in February, the total cost of furlough claims reached a staggering almost £53.8 billion, with many likely to have been attempts to defraud the taxpayer.
For businesses that do not understand the extent of their exposure, they risk facing an HMRC-imposed tax charge equivalent of up to 100% of the grant to which any recipient was not entitled and was not repaid. It is, therefore, interesting to see the number of large organisations now publicly revealing plans to repay all furlough payments. For many, this is an opportunity to boost corporate reputation and demonstrate a commitment to rediscovering business as usual. However, given the huge pressures businesses have been under in recent months, many CFOs and FDs may not have the full visibility they require to effectively manage this without the power of audit.
Furlough abuse is not the only risk to manage
This is about far more than reputational damage, the potential misuse of furlough is far from the only financial risk. The extraordinary shift in every business’ modus operandi over the past few months has opened the door for opportunistic fraud. New sources of income; staff working from home with limited oversight; the financial pressures – both business and personal – created by the recession. The misappropriation of assets should be a very real concern for businesses of every size.
For organisations that have relied upon grants and loans to survive, an employee exploiting the lack of oversight to syphon funds for personal use could tip the company into failure. Companies must determine how – or whether – deferred VAT payments and loan repayments can be made. Is the company truly solvent or no more than a ‘zombie’ business operating with a balance sheet propped up by short term government finance?
Unlocking the value in data through AI and machine learning
Business resilience and reputation is a priority in this era, and CFOs or FDs may be struggling to establish trust across businesses now operating under a whole new range of pressures, from slimmer margins to a disjointed, remote workforce. There is an obvious need for complete visualisation of financial risks, and auditors play a crucial role in unlocking this data.
The rapid identification of mistakes in government support applications, potential fraud and the analysis of which deferred payments and loan repayments can be made and when – whilst ensuring other risk factors do not jeopardise business stability – is essential to futureproof the business, and auditors can assess data to provide this information in a complete and actionable format to lead smarter company decisions. This is the data insight CFOs and FDs need today.
Traditional financial risk assessment models will not be adequate. At best, problems will be revealed months after the fact. Companies need rapid identification of areas of unexpected activity today. This is where auditors and finance departments using sophisticated machine learning and artificial intelligence techniques can deliver real business value by rapidly assessing financial data and surfacing unexpected activity. Armed with this information, finance teams will know where to focus activities, the questions to ask and the remedial action to take. This information will drive departments and remedial action to ensure business success and growth as the nation gets back to its feet.
Even though there have been changes in policies and protocols recently – and even though the pandemic has thrown curveballs at everyone – audit and finance professionals can provide businesses with the answers they need to thrive. Enhanced by AI and machine learning, they can also rapidly unveil problems that include cash flow, fraud, misuse of grants and loan repayment issues.
This places auditors and finance professionals in a strong position to develop strategies that promote business resilience and which safeguard the solvency and reputation of the business.