Prepare for model errors

forensic accounting

Model Errors: A risk that knows no industry, regulatory, or geographic boundaries.

When models do not function as intended or advertised – or are not used as intended – the results can be catastrophic. The stakes continue to rise across the globe, industries, and regulators.

Model errors often lead to fines, monitors, litigation, and other sanctions. Consider the tips below to help reduce these risks, prepare to more nimbly respond to an incident, and defend against litigation and regulatory scrutiny.

Reducing the risk

  • Develop a robust model risk management program, including appropriate governance and audits
  • Periodically test your models (even if a model works today, it may not work tomorrow)
  • Ensure your marketing materials are accurate and don’t overstate the importance of the “proprietary” model in your decision-making

Responding to an incident 

  • Covering up a mistake or responding in a non-timely manner is often worse than the mistake
  • If there is a whistleblower, don’t retaliate
  • Understand what happened before and after the error was identified
  • Be transparent with regulators and present results/findings along with remediation measures taken
  • Ensure that the person who caused the error is not assigned to lead the investigation
  • If model errors cause losses to some customers and gains to others, you will not be able to net them for purposes of assessing the company’s overall exposure

Defending yourself

  • Be prepared to demonstrate sound business judgment and why your judgment was reasonable
  • Board members should be prepared to handle questions appropriately
  • Understand the downstream impact on exposure to customers for damages, exposure to investors for reduced stock price, and exposure to penalties and sanctions from regulators
  • Regulators will be looking for evidence of someone manipulating the model

Download the full Forensics Perspectives infographic here.

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