Author: hamed

Abstract: Auditing plays an important role in all types of information systems and especially in financial information systems. Its role is critical in fraud prevention, detection or finding false positive. We will briefly talk about different types of auditing.

Audit is an appraisal activity undertaken by an independent practitioner (e.g. an external auditor) to provide assurance to a principal (e.g. shareholders) over a subject matter (e.g. financial statements) which is the primary responsibility of another person (e.g. directors) against a given criteria or framework (e.g. IFRS and GAAP). Auditing is a highly complex process, and the importance of auditors as a vital link in the financial reporting chain has never been more important nor their role as trusted advisors more valued. Below we will review different types of auditing:

External audit: Also known as financial audit and statutory audit, involves the examination of the truth and fairness of the financial statements of an entity by an external auditor who is independent of the organization in accordance with a reporting framework such as the IFRS. Company law in most jurisdictions requires external audit on annual basis for companies above a certain size.

Internal audit: also referred as operational audit, is a voluntary appraisal activity undertaken by an organization to provide assurance over the effectiveness of internal controls, risk management and governance to facilitate the achievement of organizational objectives.

Information system audit: involves the assessment of the controls relevant to the IT infrastructure within an organization. Information system audits may be performed as part of the internal control assessment during internal or external audit.

Compliance audit: In many countries, companies are required to conduct specific audit engagements other than the statutory audit to comply with the requirements of particular laws and regulations.

Investigative audit: This is an audit that takes place as a result of a report of unusual or suspicious activity on the part of an individual or a department. It is usually focused on specific aspects of the work of a department or individual.

Follow up audit: These are audits conducted approximately six months after an internal or external audit report has been issued. They are designed to evaluate corrective action that has been taken on the audit issues reported in the original report. When these follow-up audits are done on external auditors’ reports, the results of the follow-up may be reported to those external auditors.

Conclusion: There are even more types of auditing than what we have discussed above such as process audit, integrated audit, environmental and social audit and value for money audit. All types of audits, however, looking for a simple goal; preventing and detecting fraud in the system. Although more complicated auditing systems means we would face more complex fraud to detect.

References:

https://daf.csulb.edu/offices/univ_svcs/internalauditing/audits.html

https://finance.columbia.edu/content/types-audits

https://www2.deloitte.com/global/en/pages/audit/solutions/what-is-audit.html

https://daf.csulb.edu/offices/univ_svcs/internalauditing/audits.html

Abstract: The recent emphasis on regulatory compliance, mergers and acquisitions and health information exchanges has made the creating and maintaining of accurate and complete master data a business imperative in healthcare industry. In this post I will briefly discuss the importance of Master Data Management and three approaches for MDM.

To answer the question about why master data management(MDM) is important it is better to start by definition of MDM; is a comprehensive method of enabling an enterprise to link all of its critical data to one file, called a master file, that provides a common point of reference. When properly done, MDM streamlines data sharing among personnel and departments.

Three main drivers are making MDM more important than ever in the healthcare industry:

1. Mergers and Acquisitions (M&A): The IT systems of organizations involved in M&A are rarely the same, and each organization has its own master data.
2. Health information exchanges (HIEs): To successfully exchange information across locations and organizations, HIEs have to be able to reconcile master data.
3. ACOs: To understand and manage their patient populations, ACOs bring together health system data and payer data.

When we found out about the importance of MDM the next question is how to tackle it. Currently, three main approaches are available:

• IT system consolidation: abandon best-of-breed solutions in favor of monolithic EMR and ERP solutions.
• Upstream MDM implementation: organizations keep their disparate IT systems but map their master data through a third-party tool such as an enterprise master patient index (EMPI).
• Downstream master data reconciliation in an enterprise data warehouse (EDW): for organization who has already mastered its data, an EDW can work with whatever MDM approach has been adopted. And if the organization hasn’t solved its MDM problems, resolving issues with common linkable identifiers and common linkable vocabulary in an EDW platform is an option.

How to find best approach: The drawback of IT consolidation is its complexity and its expense. Also upstream implementations tend to be complicated, large, expensive, and slow-moving IT projects. We find that this approach has a high failure rate. finally while EDW platforms enable healthcare organizations to use their data to drive higher-quality, lower-cost care but it will not solve master data challenges at the level of transactional systems.

Conclusion: In real-world situations, there can be quite a bit of overlap among these M&A, HIEs and ACOs which makes selecting the best approach for MDM difficult. The solutions we have in place now for managing master data may not be comprehensive enough to encompass all the data a healthcare organization will need to leverage. An EDW can step in and bridge any gaps in an organization’s MDM strategy.

References:

http://searchdatamanagement.techtarget.com/definition/master-data-management

https://msdn.microsoft.com/en-us/library/bb190163.aspx

http://www.gartner.com/it-glossary/master-data-management-mdm/

https://www.healthcatalyst.com/master-data-management-in-healthcare-3-approaches

http://dataconomy.com/2016/03/modern-face-master-data/

False Positive:

Compliance is one area where financial institutions cannot easily cut back on costs. All those operating in financial services are obliged to screen both their clients and individual transactions, to ensure they do not breach regulations. So financial institutions conduct a daily screening of customers and transactions against a long and steadily lengthening list, which is a complex process. The result – perhaps inevitably – is that these daily screenings produce a large number of ‘false positives’, or alarms that flag an issue that must be investigated but prove to be nothing.

A Growing Problem:

The problem of false positives is deepening as the number of obligations grows. For example in case of governmental sanctions, each investigation must address the complexities of who owns what, where they own it and whether it is subject to sanctions, with all banking products subject to a lengthy screening process.

Changing the Relations:

In this way bank customers will find that obtaining products becomes a more time-consuming process: they will have to present their passports more frequently and respond to more questions, to meet the requirements for “Know-Your-Customer” (KYC) identity verification. So the onboarding process is lengthier, costs increase and customers must respond to questions that some will regard as intrusive. The additional requirements also change the nature of bank and customer relationships; previously regarded as opportunities they have come to be seen more as risks.

Conclusion:

As a result of current situation financial institution compliance departments have escaped the general trend for cutbacks and seen staffing levels increase, while their employees have enjoyed improved pay and higher visibility. These departments have also seen greater investment in technology.There still remains much work to be done in compliance and a major percentage of screening work continues to be manual. Risk intelligence will help meet the challenge and bringing previously siloed customer databases together will allow banks to achieve a single overview of risk.

References:

https://www.cognizant.com/whitepapers/OFAC-Name-Matching-and-False-Positive-Reduction-Techniques-codex1016.pdf

http://www.thetaray.com/the-only-thing-worse-than-false-positives-is-no-positives/

https://www.finextra.com/blogposting/11005/anti-money-laundering-from-false-positives-to-real-positive-with-predictive-modelling-and-big-data

Abstract: In this blog post we will discuss how data mining and machine learning can improve fraud detection in any industry. We also categorize solutions in two main parts which have their own specific patterns for fraud detection.

Fraud detection is a topic applicable to many industries including banking and financial sectors. Fraud attempts have seen a drastic increase in recent years, making fraud detection more important than ever.

Generally, data mining (sometimes called data or knowledge discovery) is the process of analyzing data from different perspectives and summarizing it into useful information. Data mining and statistics help to anticipate and quickly detect fraud and take immediate action to minimize costs. Through the use of sophisticated data mining tools, millions of transactions can be searched to spot patterns and detect fraudulent transactions.

The machine learning and artificial intelligence solutions may be classified into two categories: ‘supervised’ and ‘unsupervised’ learning.

In supervised learning, a random sub-sample of all records is taken and manually classified as either ‘fraudulent’ or ‘non-fraudulent’. Relatively rare events such as fraud may need to be over sampled to get a big enough sample size.These manually classified records are then used to train a supervised machine learning algorithm. After building a model using this training data, the algorithm should be able to classify new records as either fraudulent or non-fraudulent.

In this post I will review some strengths of Fintech and how it is changing our financial world. Also I will discuss how these changes will result to financial democratization. Based on almost daily interaction with FinTech companies, these are the general themes and impact we see which will define the future.

Anyone will be able to invest in anything or anyone: Investing in private companies and start-ups have been restricted to institutions and wealthy ‘angels’, but equity crowdfunding is already allowing investors to invest from small amounts in interesting businesses. The peer-to-peer investing space is just getting started.

In the past, while platforms like eTrade and Scottrade were able to open the high-volume markets to individuals, and electronic trading has allowed OTC trading through a browser, the new generation of fintech companies will allow investors to invest in almost anything, often through their smartphones. Moreover, the decisions will be completely controlled by the user, so investing in the next big thing, before it is even out of the garage, will be possible.

Customers could be your investors: With P2P investing, entrepreneurs can reach out to their customers first, instead of breaking their heads with potential investors, who may or may not understand their businesses.

Optimum utilisation of capital: For those of us who have dealt with venture capital and private equity firms, we know that such investing model is broken. With all the innovation in the P2P space, we’ll see that investors in Venture capitalists and Private equity firms, as well as governments, will find better ways to deploy their capital. The finTech firms are filling that gap in the market.

Your mobile phone will be your personal banker, financial advisor, wealth manager: Machine learning, chatbots, and other types of Artificial Intelligence are replacing the need to rely on humans for advice, and by 2025, we’ll be asking questions to our devices loaded with integrated third-party services that could answer those questions. Machines can access and process much more data much faster than humans ever could. Hence, inputting all your information will let you make better financial decisions without the need to hire an accountant, broker, and lawyer. They will also likely be much cheaper as the software becomes more widely available. This is not some distant future tech, this is happening now.

Conclusion: 

FinTech are starting a new chapter in financial services. Machine learning will play a huge part in this area. For the time being, the technology is nascent, so take the advice with a healthy amount of skepticism and do your due diligence, but there’s no reason to resist. With Fintech based on machine learning everybody has access to the data and can invest in the market. Limitations would be disappeared. Democratizing the market would conceal mysterious aspects of investment and lead toward justice and equity. This is the future.

References:

https://thenextweb.com/…/stock-market-and-p2p-investing-in-2025-thanks-to-fintech/

http://lending-times.com/2016/10/14/friday-october-14-2016-daily-news-digest/

https://plus.google.com/+Cityfalcon/posts/VcuSNzqvoa9

https://plus.google.com/+Cityfalcon/posts/VcuSNzqvoa9

Robinhood Markets Inc. is a U.S. based company founded in 2013. The founders announce their mission to democratize access to the financial market. To fulfil its mission, the company is swiftly stealing commission charges from online brokerages from the rich, and giving access to the stock market to the poor. The Robinhood smartphone app allows individuals to invest in publicly traded companies listed on U.S. exchanges without paying a commission . 

To sign up for the app, users must fill out an application. Once accepted, users are sent a brief video that explains the app, how to make trades and how they can get away with $0 trades.

How the company makes money:

Originally, Robinhood planned to make money off of order flow– a common tactic used by discount brokerages in the 1990s to generate revenue. Robinhood backpedaled on the idea because it executes orders through a clearing partner and, as a result, receives little to no payment for order flow. The company is willing to return to its original plan in the future if it receives order flows directly or begins to generate a lot of revenue from them.

For now, the app stays afloat for mainly two reasons. First, the business itself is extremely lean: no physical locations, a small staff, no massive public relations campaigns. Robinhood also generates interest off of unused cash deposits from user accounts according to the Federal Funds rate.

Second, venture capitalist such as Index Ventures, Ribbit Capital, Google Ventures, Andreessen Horowitz, Social Leverage, have invested more than $16 million in the app.

Some main features of the Robinhood product in addition to no commissions are account protection, secure and encrypted, fast execution by low-latency trading systems, real-time market data and smart notification.

How technology helps your investment: to describe the impacts of technology in stock market it is better to compare Robinhood with traditional players in the market. In fact, technology and competition has brought the cost of trading stocks for individual investors down to zero with the introduction of Robinhood. In addition, Robinhood does not have a minimum initial deposit requirement, whereas E*TRADE as one of its main competitors requires that its customers deposit at least $500 to get started.

In general, FinTech helps people to invest in the stock market who could not imagine entering this market due to lack of enough money or understanding the market. So it can be said that they are achieving their goal to democratize the market.

Source of table: Robinhood Market website

References:

http://blog.robinhood.com/news/2015/8/12/robinhood-at-a-play-store-near-youhttp://www.investopedia.com/articles/active-trading/020515/how-robinhood-makes-money.asphttps://www.quora.com/Should-someone-begin-investing-by-using-the-Robinhood-apphttps://www.robinhood.comhttps://techcrunch.com/2015/05/07/free-stock-trades/https://www.crunchbase.com/organization/analyst/timeline#/timeline/index

When fraud is perpetrated by employees with access to internal systems, there are several relatively easy things you can do to spot the fraud:

1. For starters, check the accounts payable system to see if there are any vendors without an address on file. If there are vendors without addresses, there is a possibility that accounts payable clerks are routing those checks to themselves.
2. Also, analyze the activity of vendors in your system. A large company may have 50,000 vendors on file that it has done business with, but may only have done business with 10,000 of them in the last few years. Those unused vendor files are ripe for abuse by malicious employees, who may by cutting checks for bogus work, and then funneling that money to themselves.
3. Take a close look at the names of the vendors on file. Malicious employees who are committing AP-related fraud may modify the names of existing vendors or create fictitious companies out of whole cloth. They may add their own initials to the front of company names, use anagrams, or use with silly names like Mick E. Mouse.
4. Cross referencing employee addresses with vendor locations routinely turns up some employees with their hands in the cookie jar. This can be done very quickly by simply matching address numbers and ZIP codes.
5. In years past, fraudsters would perpetrate their theft using post office boxes, which are guaranteed anonymity by the US Postal Service. This is one of the reasons that many companies now require actual addresses to be on file. You can flush out the little rascals by cross-checking the physical addresses of the UPS Stores and other similar stores with employee and vendor addresses.
6. In some cases, it may be useful to use visual tools to analyze street addresses in more details.
7. Many businesses close on the weekends, so if checks are routinely issued on Saturday or Sunday, that would be a giant red flag of fraud.
8. Fraud fighters can use Benford’s Law (also called the First-Digit Law) to identify suspicious patterns in checks. If the company requires a senior manager to sign off on checks over $25,000, and there is a big disproportionate increase in the number of checks written just below that number, that would be a strong indicator of fraud.

Reference:

Eight Ways Analytics Powers Fraud Detection

New software and advances in Near Field Communication technology has changed the way we buy the things we want.  Instead of cash and cards more people are using their smart phones and wearable devices.  Just wave your device in front of the credit card reader and you are on your way.

In 2015 three companies pushed their mobile pay technology and really got the industry moving.  Apple Pay had its first full calendar year in the market place, Samsung launched it’s own mobile pay service, and Google relaunched it’s wallet in the form of Android Pay.

Banks around the world are also joining in.  At the end of 2014 there were only 7 banks that had services supporting mobile pay and now 55 banks around the world have started programs.

In the last year Apple has been able to gain millions of registered users for the Apple Pay service and to add to that success they have launched the Apple Watch.  This wearable device will make it even easier for mobile pay users and is sure to bring more attention to the industry. Last year Apple was able to ship 8.8 million watches and later this year Samsung and Sony will be launching their own wearable devices.

References:

http://www.forbes.com/sites/kevinanderton/2016/04/29/mobile-payment-and-the-future-of-money-infographic/#525f32dd1e30

http://www.businessinsider.com/sc/mastercard-mobile-payments-2015-2

Here are five great reasons why Bitcoin’s price will continue to rise in the future.

1. Bitcoin value increases over time by design: 

   With Bitcoin’s transactional volume increasing worldwide every day, a cap on production in the future, and a reduction in Bitcoins produced every 10 minutes just implemented July 10th, Bitcoin values will continue to climb for the foreseeable future. U.S. Dollars and pretty much any fiat (paper) currency you can think of are losing value every year due to inflation, which is the increase of supply of said currency. Bitcoin is deflationary, by design.

2. Fiat currency fatigue: 

   With global access to the Internet, and so many recent economic collapses of paper currency, there is more interest than ever in a flat-out better economic system that is not so prone to failure after failure. Mexico and Ecuador have been in discussions to mimic the Bitcoin blockchain and create their own digital currencies. Tunisia, a North African nation, has already started its own national economic blockchain, and Japan has accepted Bitcoin as a national currency, on par with the Yen itself.

3. Wall Street/ Big businesses hasn’t jumped onto Bitcoins bandwagon yet: 

   Blockchain technology has been the darling of Wall Street, not Bitcoin. This is not without some good reason. Bitcoin has been embroiled in scandals and regulatory purgatory in many global locales, so it can be seen as a financial wild card to place big bets with. PayPal has caressed the exterior of the Bitcoin concept, but it still is not a part of their core business. Microsoft and Dell are the other major players, but until a mass adoption event happens, or is forced to happen by some greater economic meltdown, Bitcoin will be seen as an outlier, not the best bet.

4. Cash is leaving the scene anyway: Nations around the world are funnelling the mainstream into the digital payment system and away from cash through soft bans. They may be doing it for economic control over all transactions, and the ability to record and tax every transaction in the future, but consumers will get closer and closer to the realization that Bitcoin is really their digital currency of choice.
5. The Global Reserve currency keeps loosing value: As the U.S. Dollar keeps accelerating its inflation through ‘QE Infinity,’ which increases supply and erodes its value every year, global interest in it continues to wane, and a Bitcoin will cost more and more to buy on the weakening dollar. Since Bitcoin is not beholden to any country or economic paradigm run by the banking system, it can sit on the sidelines and collect value, like Gold and Silver will, while the legacy financial system continues to burn down around them. ‘Digital Gold’ has treated Bitcoin owners very, very well over the years, making incredible returns in six out the last seven years.

References:

https://cointelegraph.com/news/5-reasons-why-bitcoin-value-must-increase-in-future

In the years since the crash of 2007-08, policymakers have concentrated on making finance safer. The magical combination of geeks in T-shirts and venture capital that has disrupted other industries has put financial services in its sights. In this way a new generation of startups is taking aim at the heart of the industry—and a pot of revenues that Goldman Sachs estimates is worth $4.7 trillion. Like other disrupters from Silicon Valley, “fintech” firms are growing fast. They attracted $12 billion of investment in 2014, up from $4 billion the year before.  However, the fintech firms are not about to kill off traditional banks. The upstarts are still tiny. Nonetheless, the fintech revolution will reshape finance in three fundamental ways.

First, the fintech disrupters will cut costs and improve the quality of financial services. They are unburdened by regulators, legacy IT systems, branch networks—or the need to protect existing businesses.

Second, the insurgents have clever new ways of assessing risk, which can be called data-driven lending. This kind of data-driven lending has clear advantages over decisions based on a single credit score or meetings between banker and client.

Third, the fintech newcomers will create a more diverse, and hence stable, credit landscape. The business of internet-based firms is less geographically concentrated than that of bricks-and-mortar lenders.

If fintech platforms were ever to become the main sources of capital for households and firms, the established industry would be transformed into something akin to “narrow banking”. The bigger effect from the fintech revolution will be to force flabby incumbents to cut costs and improve the quality of their service. That will change finance as profoundly as any regulator has.

References:

http://www.economist.com/news/leaders/21650546-wave-startups-changing-financefor-better-fintech-revolution

http://www.inc.com/magazine/201509/maria-aspan/2015-inc5000-fintech-finally-lifts-off.html