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USING COGNITIVE
TECHNOLOGY FOR
Integrating cognitive technology into internal auditing practices has the potential to
r evitalize and impr ove the risk sensing and fraud examination pr ocesses used by auditors.

RISK SENSING AND

FRAUD DETECTION
YINING CHEN AND SAMUEL CHANG
ecent years have seen machine CT will mature into a self-aware intelligence

R
....................................................................................................
learning advance the sophisti- in the near future, the accounting profession
cation of cognitive technolog y needs to recognize the fast-growing technol-
( C T ) t hroug h i nc re as ed re - og y may eventually shape our world.
search and experiment at ion. Many CT processes depend on AI-based
Galarza stresses the importance of emerging systems but have a different end goal than
technologies by stating that accountants need the AI systems themselves. CT, based on
to “futureproof their livelihoods by keeping the premise of simulating human intellig-
an eye on the horizon.” 1 CT, as explored in ence, is truly a step beyond conventional
t his contex t , has rem arkable p otent i a l to AI systems. While “AI can only be as smart
make a significant impact on corporate risk as the people teaching it,” this limit does
sensing and fraud detection. IBM explains not hold for the latest CT revolution. 4 Many
that cognitive systems learn at scale, reason articles in this field of research discuss AI
with purpose, and interact with humans nat- as the direction of the future, but there are
urally. 2 They use “a blend of artificial intelli- two important distinctions between AI and
gence [AI], neural networks, machine learn- CT that must be understood.
ing, natural language processing, sentiment First, the main goal of AI is to make oper-
analysis, and contextual awareness to solve ations faster for human users. According
day-to-day problems just like humans.” 3 to Little and Cefaratti, AI technologies are
Although most researchers do not predict that “advanced computer systems that can sim-
ulate human capabilities, such as analysis,
Y I N I N G C H E N , P h . D . , C PA , i s t h e M a r y R . N i x o n based on a predetermined set of rules.” 5 In
P r o f e s s o r o f Ac c o u n t i n g a t We s t e r n Ke n t u c k y Un i v e r s i t y contrast, Salomon states that CT develops
a n d h a s a P h . D. i n a c c o u n t a n c y f r o m t h e Un i v e r s i t y o f
S o ut h C a ro l i n a . He r re s e a rc h i nt e re s t s i n c lu d e a n a ly t i c a l new “intelligent tools” that humans “can
procedures, inter nal cont rol, infor mation systems, and internalize… and use as cognitive ones,”
inte r n al au dit ing. D r. C h e n h a s aut h ore d ar t i c l e s in m any
leading academic and professional jour nals, including hence the word cognitive in the term CT. 6
Au d i t i n g : A J o u r n a l o f P r a c t i c e & T h e o r y, I s s u e s i n Unlike AI systems that accomplish a single
Account ing E duc at ion, Jour na l of Management
I n fo r m at i o n Sy s t e m s , Jou r n a l of Bu s i n e s s Re s e a rc h , an d task faster than humans using preset algo-
I n t e r n a l Au d i t i n g . rithms, CT learns by studying patterns and
makes suggestions for humans to take proper
S A M U E L C H A NG i s a st ude nt at the C arol Mar t in Gat ton
Acade my of Mathe m at ics and S c ie nce at Wester n Ke ntucky actions. In this way, CT empowers humans
University. He is pursuing a B.S. in mathematical economics with conclusions based on fast and accurate
w i t h a m i n o r i n f i n a n c e . Hi s i nt e re s t s i n c lu d e f i n a n c i a l
m a t h e m a t i c s , a c t u a r i a l s c i e n c e , a n d a c c o u nt i n g . data analysis without worr ying about mis-

MAY / JUNE 2020 INTERNAL AUDITING 15

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EXHIBIT 1 Overview of Cognitive Technology in Risk Sensing
Social media
and website
review
Internal data
Cognitive
Analytic
External data System
Survey, forums,
blogs
• Interconnected and
automated platform
• Advanced analytics
techniques
• Propriety algorithms
interpreting results made by the machine
learning system.
Second, AI uses its power to increase effi-
c i en c y of op er at ion s for aud itors . It i s
designed to make the auditor more effective.
However, CT not only focuses on making
the operations of auditors more efficient,
but it also seeks more accurate analyses in
finding solutions to problems. In this fashion,
it is more similar to intelligent data analytics,
which uses software to analyze large volumes
of data to promote accuracy of decision-
making. 7 By having the abilit y to analyze
a nd pro ce s s l a rge volu me s of d at a w it h
superior precision, CT simulates human
intelligence in real-world problem solving
and decision-making. This endows auditors
with superior precision in analysis to assist
in decision-making while ensuring ever y-
thing is still under their control.
CT and risk sensing
According to Deloitte, auditors and others
conducting risk assessments have the oppor-
t u n it y to e x p a nd t he i r c ap a bi l it i e s by
leveraging cognitive risk–sensing analytics
to detect emerging risks and anticipate dis-
ruptions. CT uses predictive analy tics and
AI to prov ide firms with “advance notice
of emerging risks, knowledge of potential
los s e vent s , a nd i nc re as ed awarene s s of
potential threats.” Specifically, cognitive
systems “analyze large volumes of [structured
and unstructured] data using advanced ana-
16 INTERNAL AUDITING MAY / JUNE 2020
Value and benefits:
• Dynamic and voluminous data
analysis
• Early risk alert and identification
• Proactive risk management and
monitoring
• Timely detection of emerging
trends, business opportunities,
and critical process-centric issues
• Relevant, contextual, valuable,
and future-focused insights
ly tics, which then transfer into actionable
insights that identify emerging risk trends,”
as shown in Exhibit 1. To internal auditing,
this presents a new frontier of risk sensing
focused on “anticipating emerging risks,”
instead of just relying on the “confidence
and insight” of human auditors. CT delivers
“insightful, proactive, and future-focused
insights” that human auditors may not have
the capacit y to provide. 8
“Cognitive risk sensing supports many
bu s i ne s s ch a l lenge s a nd opp or t u n it ie s ,
helping you to accelerate discovery, strength-
en resiliency, and capitalize on opportunities
to power performance.” 9 In the midst of
uncer taint y, modern companies need to
utilize cognitive risk sensing in their internal
audit; this can help them alleviate a wide
var iet y of r isks result ing f rom mult iple
facets of their operations. Cognitive risk
sensing can assuage losses resulting from
financial, reputational, operational, extended
enterprise (third-part y), regulator y, tech-
nological, and strategic risks. 10 Among these
risk categories, financial and regulator y
risks are both primarily concerned w ith
fiscal risk; reputational, operational, and
strategic risks each mainly arise from agency
problems; and enterprise and technological
risks are both important in alleviating inter-
and intra-corporation logistical risk. With
losses from each of these risk categories
reduced, companies are free to continue
with their multifaceted operations, devel-
opment, and business strateg y.
COGNITIVE TECHNOLOGY
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EXHIBIT 2 Cognitive Technology’s Effect on the Fraud Triangle
Pressure
CT isolates, targets, confronts, and
removes unethical behavior to alleviate
preceived pressure in the workplace.
Opportunity
CT quickly and accurately runs data
to predict future fraud opportunity
and then segregates all pathways to
eliminate it.
CT and fraud detection
Fawcett and colleagues state that “risk man-
agement, f raud detection, and intrusion
detection all involve monitoring the behavior
of populations of users (or their accounts)
to estimate, plan for, avoid, or detect risk.” 11
Although fraud detection is traditionally
conducted by experienced human auditors,
AI-based cognitive systems can take the
traditional heuristics used by human auditors
and perform fraud examinations exponen-
tially faster and more accurately. 12 In order
to uncover fraud and irregularities, tradi-
tional fraud examination entails transaction
and account balance analysis, error pattern
recog nit ion, hy pot hesis gener at ion and
elimination, and root cause discover y. The
general finding of prior research is that
models requiring more relevant information
and greater sophistication produce signif-
icantly more accurate expectations and per-
form better in error detection. 13
CT has the capacit y to incorporate large
volu me s of rele v a nt d at a ( i nter n a l a nd
ex ter na l , st r uc t u red a nd u nst r uc t u red )
into a sophisticated learning and analytical
re a s o n i n g p ro c e s s e n a b l i n g s e nt i m e nt
analysis and contextual awareness. With
the substantial data and processing power,
CT has the potential to significantly improve
the coverage, accurac y, and efficienc y of
traditional fraud examination heuristics
used by human auditors. Other than the
e x - p os t d e t e c t i on of f r au d , C T h a s t h e
potential to alleviate the ex-ante root causes
of f r au d . I n t h e fol l ow i ng s e c t i on s , we
ex plore appl ic at ions of C T i n reduc i ng
each of the three fraud triangle elements
shown in Exhibit 2.
COGNITIVE TECHNOLOGY MAY / JUNE 2020
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Rationalization
CT quells discontent of agents by dis-
tinguishing between company goals
that will cause agency problems and
those that will not.
Opportunity. Opportunity is the element
that most traditional fraud management
systems attempt to control. Although oppor-
tunity is the most straightforward categor y
to control, CT can still revolutionize the
mechanisms firms use to control it.
AI acquires huge databases of past expe-
riences in order to detect many of the same
indicators of fraud uncovered by human
auditors in the past. It can then quickly and
accurately run a firm’s data to return possible
indications of corporate fraud. However,
b a s e d on t h e i mp or t a nt d i s t i n c t i on of
patterns recognized earlier, CT does not
focus on detecting specific occurrences of
fraud but rather takes in data to compose
new systems to detect a wider spectrum of
fraud. It then implements these systems in
A I te ch nolo g y to e ven more a cc u r ately
isolate possible occurrences of fraud as well
as release the newly developed systems for
experienced auditors to improve upon. The
more CT works on a program, the fewer
opportunities firm officials and agents will
have to commit corporate fraud. Because
a computer can run operations millions of
t i m e s f a s t e r t h a n t h e hu m a n m i n d c a n
produce ideas, a CT program can eventually
segregate v irtually ever y possible pathway
to committing fraud, thereby putting a stop
to new ideas and opportunities for fraud.
Pressure. Many auditors do not recognize
the potential for corporate policies or pro-
grams to reduce the pressure and motivation
elements of fraud; however, a fundamental
psychological element needs to be taken
into account here. Psychologists often make
the distinction between real and perceived
pressure (or risk). There are ver y few me-
INTERNAL AUDITING 17
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thods firms can use to alleviate real pressure
from their employees’ lives because most
real pressure comes strictly from personal
issues that are outside of firms’ control.
However, perceived pressure, more times
than not, is caused by firm officials’ actions
or firm policies that CT can help reform.
CT is one of the few technologies that is
able to prov ide intelligence on corporate
culture, employee behavior, voices of
individual employees, etc. 14 While CT
CT CAN HELP NOT c a n n o t prom o t e e t h i c s or e t h i c a l
ONLY REACH THE behav ior, it can be effective in iden-
GOALS OF INTERNAL
AUDIT BUT ALSO
tifying or isolating unethical behavior.
INCREASE THE Running data through CT programs
EFFICIENCY AND c an prov ide insig ht on unjust and
EFFECTIVENESS OF THE unethical actions of officials toward
AUDIT PROCESSES. employees. From gender inequalit y
in salaries to racial discrimination in the
workplace, CT has the potential to single
out each occur rence. B ecause perceived
pressure is inevitably tied to this unethical
behavior, it can be eliminated by targeting,
conf ront i ng , a nd remov i ng of f ic i a ls s et
apart by CT-developed programs. Once the
cause of perceived pressure is removed, the
corporate fraud motivated by this pressure
can be simultaneously allev iated.
Rationalization. The rationalization ele-
m e nt o f t h e f r au d t r i a n g l e i s i n e xo r a -
bly t ied to the existence of agenc y pro-
blems. “Agency problems emerge when the
conflic ts of interest between agents and
principals, or between the principals them-
selves, affec t the operat ion of the firm’s
businesses.” 1 5 When agents disag ree w ith
the mission and actions of principals, the
rat ionalizat ion of cor porate f raud comes
into play.
Using the same logic used to allev iate
opportunit y and pressure, CT can take the
highly subjective issue of interest-alignment
between agents (officials) and principals
and allocate it to a completely objective
computer program. The more distinctions
between non-problematic and problematic
policies that a CT program can add to its
knowledge base, the more accurate a CT
program can be in determining whether a
certain goal promoted by principals will
cause agency problems. With the removal
of agency conflicts, much of the discontent
of rebellious agents can be assuaged, and
the factor of rationalization can be effectively
quelled.
18 INTERNAL AUDITING MAY / JUNE 2020
CT for internal auditing use
An internal audit is known to prov ide:
• independent and objective assurance
for risk control;
• insightful adv ice for risk management;
and
• proactive anticipation about risk emer-
gence in order to add value and improve
upon operations of the business. 16
CT can be embedded into the internal
audit process to enhance each of the afore-
mentioned internal audit goals. In particular,
cognitive analytics can leverage open-source
intelligence to help assess and prioritize
existing risks and, most importantly, detect
emerging risks and anticipate disruptions.
CT can help not only reach the goals of
internal audit but also increase the efficiency
and effectiveness of the audit processes.
Specifically, during the audit planning stage,
CT provides risk indicators to help auditors
plan a risk-based audit by focusing on and
pr ior it izing ident ified r isk areas. Whi le
conducting risk assessments, CT promotes
an aggregated risk view, provides real-time
risk alerts, and predicts potential and future
risks. Regarding the effectiveness of risk
management and control, CT enables timely
and precise detection of risk and fraud with
their root causes uncovered. CT also offers
audit reports and responses that prov ide
va luable insig ht and meaning f ul adv ice
with wider and more future-oriented per-
spectives.
Malone states that “the audit may be de-
scribed as a sequence of decisions begin-
ning with audit planning and ending with
an audit opinion. The abilit y to automate
this process lies in the ability to break down
the audit life cycle into identifiable tasks and
effectively model one or more of these given
tasks.” 17 The audit planning would be pro-
grammed into the cognitive system, but the
audit opinion generated by the cognitive
system would be developed through AI-based
modeling of each task in the audit life cycle.
This allows the CT system to develop unique
opinions that find data patterns and return
newly learned algorithms and methods to
the user.
Implementation implications
It should be noted that while many assert
that CT is without flaws, one of the biggest
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INTA-20-03-015-Chen-OM.qxp_INTA Article-R 5/27/20 11:37 AM Page 19
detriments to the successful application of
CT on risk sensing and f raud control is
improper use of procedural abstraction.
According to Anu, an abstraction error is
“a f l aw i n hu m a n t hou g ht pro ce s s t h at
produces an incorrect result, such as software
containing a fault. The flaw in human thought
process may occur while tr ying to under-
stand a given information, while solving a
problem, or while using a method or a tool.” 18
By this definition, if users do not have proper
knowledge of the capabilities and reasoning
of the cognitive system, their judgment and
de c i s ion s m ade f rom t he con clu s ion s
suggested by the system could be biased or
incorrect. Hammond points to the lack of
objectivit y (bias) and cautions that when
intelligent machines are implemented, they
often reflect the biases of humans who create
or interact with them. 19
Other than abstraction, firms should be
aware of a few other challenges facing the
i mp l e m e nt at i on of C T. Fi r s t , l i ke a ny
adopt ion of i n nov at ive te ch nolog y, C T
implementation can be overruled by users
due to their resistance of change and fear
that CT, which is capable of learning like
humans, may replace humans someday. Sec-
ond, with its capability to handle and analyze
voluminous data, a cognitive system under-
takes a considerable challenge concerning
data securit y and
WHILE THE IDEA OF i nte g r it y. T h i rd ,
EMPLOYING MODERN
du e to t h e c om -
TECHNOLOGIES IN
ACCOUNTING AND
plexity and speci-
AUDITING IS CERTAINLY ficity of cognitive
NOT NEW, THE SCALE OF systems, a lengthy
THEIR IMPACT ON THE development cycle
FIELD WILL BE MORE and major mone-
SUBSTANTIAL.
t a r y i nve s t m e nt
are almost certain, making the development
of cognitive capabilities difficult for smaller
companies.
To make cognitive system adoption suc-
cessful, it is essential to actively involve
the auditor throughout algorithm design
and system development. Active user par-
ticipation increases a user’s comprehension
of t h e s y s t e m w h i l e d e c re a s i n g t h e i r
resistance. It is also important for firms to
create a change-management plan with a
long-term v ision of how users will benefit
from the new technolog y. At the same time,
it is essential to develop a system securit y
strateg y that will relieve the concerns of
COGNITIVE TECHNOLOGY MAY / JUNE 2020
.............................................................................................................................................................
data securit y and encourage the adoption
of cognitive computing.
Whi le the idea of employ ing moder n
technologies in accounting and auditing is
certainly not new, the scale of their impact
on the field will be more substantial. Among
the varieties of technolog y, auditors are
anxious to learn whether CT can multiply
t hei r pro duc t iv it y af ter a l l . Audit i ng i s
particularly suitable for applications of CT
that “incorporate the vast volumes of struc-
tured and unstructured data to gain insight
regarding financial and nonfinancial per-
formance of companies.” 20 Properly applied,
CT reduces time, saves money, and creates
value from streamlined processes and deci-
sion-making. Not only does CT help in the
analysis of past events and transactions,
but it also assists in ant icipat ing f uture
events through predictive analysis. Its appli-
cation in internal auditing enables auditors
to reorient their focus f rom per forming
mundane procedures and analyses to crea-
tive work and decision-making based on
the intelligence and advice provided by the
cognitive system. n
NOTES
1
G a l a r z a , M . , Th e ch a n g i n g n a tu r e o f a c c o u n t i n g ,
Strategic Finance 98, no. 8 (2017): 50–54.
2
Schroeer, T., “Cognitive computing: Hello Watson
on the shop floor,” IBM (May 9, 2017) (blog). Available
at: www.ibm.com/blogs/internet-of-things/iot-cog-
nitive-computing-watson.
3
Makadia, M., What is cognitive computing? How
are enterprises benefitting from cognitive technology?
Towards Dat a Science (May 10, 2019). Available at:
https://towardsdat ascience.com/what-is-cognitive-
c o m p u t i n g - h ow- a r e - e n t e r p r i s e s - b e n e f i tt i n g - f r o m -
cognitive-technology-6441d0c9067b.
4
5
Op. cit. note 2.
Little, B. and Cefaratti, M., Information technology
tools and awareness of cyber trends, Internal
Auditing 34, no. 3 (2019): 20–29.
6
Salomon, G., AI in reverse: Computer tools that
turn cognitive, Journal of Educational Computing
Research 4, no. 2 (1988): 123–139.
7
8
Op. cit. note 5.
“Cognitive risk sensing: Enabling internal audit to
anticipate risks,” Deloitte (Oct 10, 2019) (webcast).
Available at: www2.deloitte.com/us/en/pages/dbriefs-
we b c a s t s / eve n t s / o c t o b e r / 2 019 / d b r i e f s - c o g n i t i ve -
risk-sensing-enabling-internal-audit-anticipate-risks.html.
9
10
Ibid.
Op. cit. note 8.
11
Fawcett, T., Haimowitz, I., Provost, F., and Stolfo,
S., AI approaches to fraud detection and risk man-
12
agement, AI Magazine 19, no. 2 (1998): 107–108.
Kokina, J. and Davenport, T.H., The emergence of
artificial intelligence: How automation is changing
a u d i t i n g , J o u r n a l o f E m e r g i n g Te ch n o l o g i e s i n
Accounting 14, no. 1 (2017): 115–122.
13
Leitch, R.A. and Chen, Y., The effectiveness of expec-
t a t i o n m o d e l s i n r e c o g n i z i n g e rr o r p a tt e r n s a n d
generating and eliminating hypotheses while
conducting analytical procedures, Auditing: A Journal
of Practice & Theor y 22, no. 2 (20 03): 147–170.
INTERNAL AUDITING 19
INTA-20-03-015-Chen-OM.qxp_INTA Article-R 5/27/20 11:37 AM Page 20

14 18

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Op. cit. note 8. Anu, V.K., “Using human error models to improve
15 the quality of software requirements,” North Dakota
Machado, M.R.R., and Gartner, I.R., The Cressey
hy p o t h e s i s ( 19 5 3 ) a n d a n i nve s t i g a t i o n i n t o t h e State University (May 2018) (dissertation). Available
occurrence of corporate fraud: An empirical analysis at: https://pdfs.semanticscholar.org/321a/501af2ade9d
conducted in Brazilian banking institutions, Revist a 83c943fd12b517b3b86341519.pdf.
19
Cont abilidade & Finanças 29, no. 76 (Nov 2017): Hammond, K., “5 unexpected sources of bias in
60–81. artificial intelligence,” TechCrunch (Dec 10, 2016)
16
Op. cit. note 8. (blog). Available at: https://techcrunch.com/2016/
17
Malone, D., Expert systems, artificial intelligence, 12 / 10 / 5 - u n ex p e c t e d - s o u r c e s - o f - b i a s - i n - a r t i f i c i a l -
and accounting , Journal of Education for Business intelligence.
20
68, no. 4 (1993): 222–226. Op. cit. note 12, p. 116.

20 INTERNAL AUDITING MAY / JUNE 2020 COGNITIVE TECHNOLOGY

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