AI-enhanced deception: The audit industry’s next big test
The audit industry has been under the microscope over the past few years following a number of high-profile corporate collapses, prompting stricter measures to restore public trust.
And with the rise of AI-driven fraud, auditors will be under more pressure than ever to adapt to an evolving risk environment.
The Financial Reporting Council (FRC), the watchdog for the sector, has shifted from a ‘gentle’ supervisor to a proactive prosecutor, issuing hefty fines in the millions against firms and individuals for any shortcomings.
According to data seen by CityAM last April, the regulator had fined the Big Four giants over £154m, pre-discount, over the last five years. Most of the large-figure fines against the Big Four stemmed from audits of major businesses that collapsed over the years, including construction giant Carillion and London Capital & Finance.
But it doesn’t stop with the Big Four. Others have been in the headlines, including BDO, which was slapped with a £6.5m fine in November after two of its former audit engagement partners admitted misconduct in an audit.
The regulator shifted its attention and resources to smaller firms with the launch of the ‘Scalebox initiative’, which aimed to have the FRC coach these firms directly to improve their audit quality.
However, with the surge in investment in AI across all walks of business, there has also been a rapid surge in sophisticated AI-driven fraud. A study by SAP Concur found that from September to November 2025, Google searches for ‘AI receipts’ rose by 340 per cent, as businesses saw a sharp increase in fraudulent expense attempts.
Audit quality is only as good as the underlying data it is based on, and some of that is inflated by very good AI; it can make the role of an auditor that much harder, which is causing concerns within an industry already so under the scope.
James Polson, audit partner at Deloitte, stated, “As an auditor, considering the risk of falsified evidence is really important when assessing the reliability of information used as audit evidence, with advancements in AI no doubt heightening this risk.”
What are firms seeing?
The CEO of London-listed MHA, Rakesh Shaunak, noted that while the firm has not seen a widespread increase in clients deliberately supplying falsified data, they are seeing a change in how information is generated and presented.
“Finance teams are increasingly using AI tools to draft explanations, summaries and technical position papers, including preliminary assessments of accounting treatments,” he explained.
The concern is not around the emergence of entirely new fraud, but the sheer sophistication of existing types, as AI has the potential to make these techniques easier to execute and harder to detect.
Alex Russell, ICAEW head of audit and assurance strategy, highlighted, “the auditor approach doesn’t change – it’s the management’s responsibility first and foremost to prevent and detect fraud”. However, going forward, “the preparedness of auditors in giving them the best chance to detect material fraud is key, especially around skills.”
Reinventing assurance
Like their clients, most firms also have their own AI tools, with some of the Big Four investing billions of pounds in new digital tools. As Polson noted, “AI also brings opportunities for the auditor, supporting teams by helping to spot patterns or anomalies more quickly, augmenting the audit process.”
While a KPMG UK spokesperson said it has deployed such technologies at scale across our audit practice, with benefits to audit quality, including the provision of additional insights.”
However, by using its own AI to detect any fraud, Shaunak pointed out that “Training also plays a critical role” as he noted these “tools support rather than replace professional judgement”.
If AI-enabled fraud does become a greater risk for the sector, Esther Mallowah, ICAEW head of tech policy, warned that “auditors may need to be present when key pieces of evidence are generated”.
In addition to strong analytical skills, auditors will need to brush up on communication and critical thinking, which are likely to become even more important in their jobs.
Mallowah added, “Auditors will need to be more effective at discussing the evidence and asking the right questions to help identify evidence that does not align with the auditor’s knowledge of the business and conversations with management.”
Shaunak highlighted, “The FRC’s focus on audit quality reinforces the importance of getting the fundamentals right: robust risk assessment, strong documentation and clear.”
Given the nature of its work, the audit industry is mired in red tape. Mistakes can bring major headaches for both auditors and their firms. Now, it must manage reputational risk amid this surge in AI-enabled fraud before it faces even more expensive problems.