The Three Pillars of Modern Transaction Monitoring

Transaction monitoring  – the cornerstone of the audit process

It has been a way to infer to some level of probability that a control is effective. The control of greatest significance for the longest time were the accounts with their own magical double-entry controls. Confirming the validity of balances, allowed an auditor to express whether they represent a true and fair view of the financial affairs of the company. This in turn allows an investor to judge the amounts, timing, and certainty of future cash flows. It coincidentally has some capability to find fraud. Now we all realize that by the time an issue is reflected in the books of account, any issue is by definition historical with little chance to correct.

We have controls in place within processes that are far upstream from the accounts. We also all realize that we have obligations to constituencies beyond investors: employees, customers, vendors, and that controls must be in place to protect their interests. Of course, we now have legislation that enforces these obligations, not least of which is GDPR. We also realize that damage can be done to a company’s reputation even if the internal controls over financial reporting are effective. For all these reasons transactions need to be CCM continuous controls monitoring to confirm that internal controls, financial, information security and reputation are well designed and remain effective.

Sampling

Within the Auditors toolkit has always been sampling, as a way to predict with a known level of probability whether the hypothesis that a control is effective can be asserted. Verifying every transaction by human power is an expense rarely justifiable to shareholders. Even sampling has had some improvements with the ability to coordinate sample sizing with control frequency and coordinate samples with audit procedures, records request and engagement letters. In this way, samples can support the evaluation of many controls in the overall audit plan. With the early focus on the accounts as being the touchstone of internal controls, the hypothesis being tested was that every balance could be supported by underlying transactions and that all transactions get processed. As the audit universe has expanded, hypotheses being tested have expanded: all authorizations have been approved, all expense claims are legitimate, all employees have passed background checks, all activity on the network is legitimate.

Continuous Controls Monitoring

With the need to increase the reliability of controls, coupled with the need to make the control verification methodologies much more efficient, transaction monitoring moved into the realm of rules being applied and every transaction being evaluated. If we take the example of all expense reports being legitimate, we may have rules that report numerous transactions just under authorization limit or multiple employees with expenses to the same vendor on the same day. Being able to report these allows us to move from a sample-based approach to a substantive approach and therefore have a much higher degree of confidence in the assertion. This increase has only been viable because of the ability to deploy specialist tools for continuous controls monitoring, but they can only be as good as the rules that they evaluate.

Where is Transaction Monitoring going?

Audit as a Service and mining for audit rules

Anomalous transactions are by definition rare. The rate of learning is very dependant on having training data. SaaS companies have access to the precious commodity of fraudulent transactions across their tenants. This means members of the service share the spoils of the service in terms of the refinement of the rules. It also means that the service provider has to be able to guarantee privacy in the use of the learning data. Extraction and Anonymization capabilities must be transparent so that all parties can understand this risk.

Audit Optimisation

Given that manual audit will continue to be necessary we need to develop a risk management audit tool program that will focus scarce audit resources on where they can provide the most value to the organization. Objective Function to minimize residual risk, maximize reliability, maximize confidence in the assertion and minimize cost, subject to the constraints of limited people and budgets. Audit Procedures confirm a set of controls that if they prove to be effective, reduce the residual risk in a number of risks identified in the risk assessment phase of an audit program. We also know the time and costs associated with their execution. This allows us to ranks them according to their “risk removed”. We can also modify the time and cost for sample size in the control and increase or decrease the confidence in the result. In this way we can optimize for both “Risk removed” and “Confidence Gained” subject to cost and resource constraints.

Conclusion

A transaction monitoring solution is vital to protect the validity of financial reporting, assets of the enterprise, Information security, and reputation of any organization. Transaction monitoring is necessary to confirm internal controls are designed well and working effectively. Having adequate internal controls is mandated under many regulations that now include GDPR. A transaction monitoring solution should include manual audit, continuous transaction monitoring machine learning and audit optimization. Specialist providers in the cloud have an advantage in speed of learning through getting training data from many tenants.