NDEMO: Regulatory analytics can help stem corporate fraud - Daily Nation

Regulatory analytics can help stem corporate fraud

Monday November 5 2018

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The Capital Markets Authority (CMA), one of the financial regulators in Kenya, has done a sterling job in protecting consumers from rapacious players.

However, it needs to do more by embracing predictive analytics to avoid malpractices such as the ones we are witnessing in state-owned listed companies.

Investors at the Nairobi Securities Exchange (NSE) have lost close to $1 billion in state-owned firms, mostly due to poor management and blatant disregard of corporate governance.

This is happening even though the CMA has in many ways been educating stakeholders on good governance practices.

Unfortunately, few leaders in the public sector have the motivation to fully comprehend the benefits of good corporate conduct.

In my view, we underestimate the culture or habits that define who we are, and this is the main cause of failures in corporate governance.

Human beings do many things without engaging their brains. For example, no one wakes up to think about what foot, right or left, moves first. This is a reflexive action requiring no effort or conscious and rational decision-making. It is a habit or a routine - an unthinking response to the environment.


Bad habits or unethical behaviours sometimes become habits of the mind. Most appointees, as well as the appointers of directors to quasi-public enterprises, take actions at the subconscious level, sometimes emotionally, to please their political guarantors. Their appointment is deemed as a community appointment that will be measured by how many of their own tribesmen have jobs in the organisation. Interestingly. this action is expected even by those who know that it is contradictory to the principles of good corporate governance.

It is almost impossible to change this behaviour pattern through any form of education.

It is also no secret that some organisations hire consultants to develop all the required documents simply to be certified as ''compliant''.


However, there are emerging tools that could eventually help change behaviour. These tools were developed in the aftermath of the US financial crisis to enable the Securities and Exchange Commission (SEC) to carry out predictive analytics.

A further investment in people and capabilities has restored confidence in US securities markets.

A simple sentiment analysis of the unstructured social media feeds could have easily predicted failure in virtually all the state-owned firms that are now in a financial crisis.

A November 18, 2016 speech, ''A New Model for SEC Enforcement: Producing Bold and Unrelenting Results'', by former SEC chair Mary Jo White at the New York University School of Law’s Program on Corporate Compliance and Enforcement, summarises what we need to do to further enhance our corporate governance. The following is an excerpt from her speech:

''Firms can level the playing field with analytics. New ways of analysing big data, small data, and unstructured, fragmented ''dark data'', as well as concurrent advances in analytics software and platforms, provide organisations with an opportunity to stay a step ahead of potential violations. Regulatory analytics, a growing category of information analysis, involves gathering and storing relevant data and mining it for patterns, discrepancies, and anomalies. Using regulatory analytics with a forensic lens, firms can detect and head-off potentially improper transactions or wrongful actions before they create peril for the firm. Regulatory analytics is an element of enterprise fraud and misuse management (EFM), the capability to screen transactional activity for evidence of fraud in real-time, as well as diagnose external fraud rings that may threaten the organisation.''

There is a need for regulatory analytics in Kenya to detect potential risks and develop some mitigation measures. Emerging technologies like blockchain and artificial intelligence could even do better, considering that monitoring each firm could be simplified and as a result improve productivity.


CMA brought sanity to the capital market, it needs further investment beyond the current audit measures. But people have become too sophisticated, and it is difficult to unlearn unethical behaviours.

Staying ahead of their game through analytics may be the best solution at the moment.

Ramez Naam, an American professional technologist and science fiction writer once said, ''We've seen over time that countries that have the best economic growth are those that have good governance, and good governance comes from freedom of communication. It comes from ending corruption. It comes from a populace that can go online and say, 'This politician is corrupt, this administrator, or this public official is corrupt.’”

It is such openness and its outcomes in the form of unstructured data that can potentially foster good governance. People keep on saying things on social media about what is happening. When the data is analysed and used to predict what will happen, it becomes the antidote for poor governance.

The writer is an associate professor at the University of Nairobi’s School of Business. Twitter: @bantigito