AI, Fraud Risk, and Financial Reporting: Inside the AFC’s Oteal Pharmaceuticals Case Study
Artificial intelligence (AI) is rapidly becoming part of how organizations analyze information, streamline processes, and make decisions. The CAQ’s S&P 500 10-K analysis found that 90% of companies mentioned AI in their 2024 filings, a 24% increase from the previous year. As adoption accelerates, many companies are exploring how AI can improve efficiency across financial reporting and other functions.
At the same time, AI introduces new considerations for financial fraud risk management. Technology can affect how risks emerge, how information is evaluated, and how quickly issues spread through an organization. Understanding those implications requires organizations to look beyond the technology itself and focus on governance, internal controls, and fostering an anti-fraud culture.
As a member of the Anti-Fraud Collaboration (AFC), the CAQ develops resources to help financial reporting professionals navigate these challenges. The recently updated Oteal Pharmaceuticals case study combines a familiar fraud-risk scenario with an AI-enabled environment, sparking discussion about how to spot and respond to technology-driven risks. Read on to learn more about the exercise and what it reveals about AI, fraud risk, and financial reporting.
Technology can affect how risks emerge, how information is evaluated, and how quickly issues spread through an organization.
A Traditional Fraud Risk Scenario in a New Environment
The Oteal scenario centers on a public company experiencing rapid growth in a new international market. As pressure mounts to meet ambitious growth targets, employees face challenges related to documentation, oversight, and communication across multiple jurisdictions.
The company’s accounting team discovers unusual sales activity near quarter-end, including indications that distributor arrangements may have included terms not reflected in approved contracts. An AI-enabled tool helps identify the unusual patterns, and as management examines the issue, broader questions emerge about revenue recognition, documentation, internal controls, and the organization’s use of AI-generated translations and summaries.
The scenario is intentionally complex to reflect potential real-world risks. It begins as a potential accounting issue but quickly becomes a cross-departmental discussion, emphasizing that fighting fraud is a shared responsibility among all stakeholders.
The scenario is intentionally complex to reflect potential real-world risks.
What the Case Study Demonstrates
One of the central themes of the case study is that AI did not cause the failure; rather, it exposed fundamental weaknesses in governance, culture, and controls.
The pressures facing Oteal’s employees, the opportunities created by weak oversight, and the rationalizations used to justify questionable decisions are all familiar elements of the fraud triangle. Those dynamics existed before AI and will continue to exist regardless of technological advances. In Oteal’s case, technology helped surface potential issues, and it also highlighted how quickly weaknesses in governance, oversight, and documentation can introduce risk.
The scenario serves as an important reminder that financial reporting professionals must remain vigilant as organizations integrate AI and other technologies into business processes. While new tools may change the flow of information, they do not diminish the need for professional skepticism, sound judgment, and effective oversight.
The scenario serves as an important reminder that financial reporting professionals must remain vigilant.
Why Cross-Functional Oversight Matters
Another key lesson from the scenario is the importance of cross-functional collaboration. Throughout the case, various stakeholders recognize pieces of the risk, but no single function has complete visibility into the emerging issues.
Given each stakeholder’s distinct role, deterring and detecting fraud requires strong communication among all participants in the financial reporting ecosystem. Regular cross-functional discussions can help create a shared understanding of how governance, controls, and oversight responsibilities should evolve alongside the organization’s use of AI.
Using the Case Study
The Oteal Pharmaceuticals case study is designed as a practical discussion exercise for management, boards, audit committees, internal auditors, external auditors, compliance leaders, technology professionals, and students. The most productive conversations often occur when participants from different functions bring their unique perspectives to the discussion.
As organizations continue to evaluate how AI can enhance business processes, this case study provides an opportunity to explore how emerging technologies may affect fraud risk, financial reporting, and governance. More importantly, it encourages collaboration and a culture that can help organizations identify and address risks before they become larger issues.
Explore the Oteal Pharmaceuticals case study and follow the AFC on LinkedIn for additional anti-fraud resources.