Monday, February 04,
My early days in the profession witnessed going to the field with loads of prior year audit files stacked in several volumes sometimes up to ten volumes depending on the size and complexity of the engagement. As a year one Audit Associate then, one of my tasks on any engagement was to obtain and move to the field long and short analysis spreadsheets with which we are to document audit work to be performed plus the prior year audit files. Today, audit professionals go to a client with their laptop, equipped with audit software to deliver seamless quality audit service to clients.
However, current technology being used by audit practitioners has its limitations and no longer meets the ever growing needs of practitioners today’s complex global economy. Since modern-day audit professionals have been exposed to how applying cutting edge technology can be a key differentiator with clients and talents. Also as the industry moves forward, organisations will require carefully crafted business strategies that anticipate the ultimate effects of regulatory reform, technology changes, competitive dynamics and market movements, hence audit firms must continue the tradition of excellence and innovation in audit technology by embarking on initiatives and invest in new technology and skills to shape the future, remain competitive and remain relevant in the future.
There is wide debate around the impact that advances in technology in this disruptive era will have on the scope and relevance of the audit of the future. If we do not engage with these developments the outlook could be bleak: at best the profession as we know it will become less relevant and at worst we might not remain in business at all. But if we harness the opportunities that technology disruption offers us then we have a very exciting and integral role to play.
Over the past 10 to 20 years there has already been a significant change in how we all use technology – both in business and socially. However, the rate of technology change that is around the corner is likely to be significantly greater than any we have experienced to date. As an example, market research company Forrester reported that by 2021 robots will have eliminated 6% of all jobs in the United States – just a few years away.
And set against this backdrop we have a profession steeped in tradition and operating within rigid regulatory frameworks. Do these disruptive technologies present an opportunity or a threat to the auditing profession?
While this pace of change will be perceived as a significant threat by many in the profession, this is a time of great opportunity for the profession if we embrace it. The biggest risk for auditors lies in doing nothing in response.
Some routine roles/tasks will undoubtedly be eliminated. However, there will always be a need for skilled, human auditors who can apply sound judgment and arguably this is even more important in an increasingly technology-enabled world. After all, who will decide what information should be fed into technology-enabled tools? Who will interpret and communicate the results? And who will ensure that end users can rely on the output from these tools and have a robust understanding as to how risks such as cyber threats have been mitigated?
Technology is already changing the face of the audit profession. Machines are helping us today to do audits faster, efficiently and with a reduced risk of error.
Analytics has been a buzzword within the audit landscape for a number of years now and it remains a pivotal part of the move towards the audit of the future. Improvements in analytics capabilities are enabling auditors to concentrate their efforts towards outliers in a population and allow 24/7 analysis of huge data sets. Suddenly testing complete data sets rather than a sample-based approach is achievable and the concept of continuous audit within reach, allowing auditors to test audit evidence in real time, with timely identification of issues and insights and allowing focus on anomalies in a population.
Audit Analytics has an important role in raising the audit quality bar, in particular, enabling stratification of data and focused testing of large or complex data sets. As with many of the technology solutions which are going to become part of the auditor’s future toolkit there is a critical dependency on the standardisation of data as a pre-requisite to being able to overlay these advanced tools.
Going forward, there is a shift towards predictive analytics – using analytics capabilities to predict events, explain when and why they might occur using simulation and modelling and also prescribe the most effective path to maximise opportunities. Such developments will allow audits to be increasingly precise in targeting risk and increase their relevance.
AI is simply the task of getting computers and machines to do tasks that require intelligence when done by humans. Most current AI is narrow in that it is created to deliver a specific task within certain programmed parameters. This means the AI is reliant on humans providing initial instructions and algorithms.
Cognitive computing uses artificial intelligence and machine learning algorithms to go beyond analytic capabilities and to learn and make autonomous decisions. AI is considered a fundamental advance in driving efficiency and quality of output.
The concept of AI is not new and is being actively explored and rolled out in a broad range of areas – from the healthcare sector to the automotive industry, from online advertising to credit agencies. Unsurprisingly, the audit profession is also exploring the opportunities and potential for harnessing AI within an audit approach.
Emerging technologies like AI present the audit profession with many opportunities to improve the way we work, to provide better services delivered in a more efficient way and bring enhanced insight into the audit process.
Just take one example of natural language processing: using advanced machine learning techniques, auditors are now able to quickly process, highlight, and extract key information from electronic documents. These cognitive capabilities enable the auditor to assess a far broader population set in its entirety and focus effort on key items of interest and insight while the repetitive or low judgement area of extraction is automated.
Although automation, analytics and cognitive technologies in themselves have the power to disrupt how audits are delivered – and indeed the business models and structure of audit firms – the real transformation of the audit profession will occur as these exponentials converge and combine with new technological disruptors, such as distributed ledgers – often referred to as the blockchain.
Distributed ledgers are becoming an increasingly hot topic. The concept of a secure, distributed ledger of information which provides a platform for representing and exchanging things of value could disrupt the way in which transactions are conducted and recorded in the future. Many organisations are starting to recognise the potential of blockchain technology and some are investing heavily in experimenting in this area.
Over the last five years, blockchain has evolved from a cryptocurrency or payment system to a broad ecosystem of digital automation opportunities.
The blockchain provides an immutable record of a transaction established in code. Some have suggested the future possibility of triple entry accounting where every accounting transaction recorded by an entity also has a corresponding posting onto a public blockchain. All the transactions on a public distributed ledger are available to all the users in the network, making the system transparent by design.
In reality, this feels a little far off and is dependent on collaboration within a complex ecosystem of companies, regulators, standard setters and government. The more likely route over the short to medium term is that some core building blocks of the blockchain concept will be incorporated into the way in which private groups of companies transact.
One such example is the way in which blockchain can be used to record smart contracts between entities. Such contracts could dramatically disrupt the way people do business. It is easy to see the advantages of users being able to interact with smart contracts to invoke an automatic execution of defined rules and as a way of securely holding and transferring legal title of the asset. Details of how to account for the contract could also be included within the smart contract. This would enforce congruence between the recognition of costs in one entity and the recognition of revenue in the other. Such transactions are self-verifying meaning that someone auditing the recognition of revenue from the contract would know that the other party to the contract has agreed the costs incurred, either themselves or through a trusted source of verification.
And what is the long term view? Put the concepts of smart contracts and triple entry accounting together and the world of auditing looks very different. With all transactions verified by an independent source (or the other party to the smart contract) and a complete history of all transactions on the blockchain, the focus can move from the audit of transactions in a year to auditing the terms of the smart contract itself.
Rather than waiting until year-end to see the impact of an entity’s transactions on their financial statements, auditing could occur as smart contracts are created, before the transactions even take place. Misstatements, either due to fraud or error could be stopped before they occur. Auditing becomes real time – not an annual event looking back at the past year, hence bringing a new lens to transparency and corporate reporting.
Most development efforts using distributed ledgers remain highly experimental, and practical applications and large-scale commercial solutions have yet to emerge. And of course it is not without its negative press; the instability of Bitcoin is a seasoned discussion point. More recently, the negative press associated with the “hacking” of ledgers due to potential flaws in the code has made people realise that the blockchain may not be as impenetrable as thought.
Blockchain is still a relatively early stage technology. However, despite the very obvious current challenges and its unpredictable journey to maturity, the disruptive potential of distributed ledgers remains significant.
As a profession that is steeped in tradition and surrounded by frameworks and concern for regulatory challenge it is going to take a concerted effort to embrace and proactively respond to the opportunities and challenges that the digital and technological revolution will bring. Some of the biggest hurdles will be around responding in an agile way and having a forward-looking mindset.
Technology disruption is not a distant future state – it is here and now. If the profession is going to remain relevant it needs to embrace these changes. And the pace of change remains one of the biggest threats to the profession. If we are not proactive in our response to these technological advancements then the traditional audit services and audit firms are wide open to challenge from the more agile startup community.
The response required is complex and requires interactions from multiple stakeholders. Each of these stakeholders is critical in ensuring the ability of the profession to move forward.
While there are many important stakeholders, in discussing the future of the audit profession it is auditors themselves who should be seeking to drive the agenda. There is a responsibility on audit firms, particularly the largest firms, to continue to invest in developing increasingly technologically enabled audits. This needs to involve some experimentation and an active ongoing dialogue with regulators as new techniques emerge.
The increasing use of technology will result in new challenges for businesses and new risks in the audit process. Auditors will need to validate the design and controls around the platforms which host the new software in addition to interpreting the complex data sets that arise.
All firms – regardless of size – have the potential to be disrupted by technological advancement. While smaller and medium practices may not be able to invest in experimentation on a scale that larger practices are able to, building awareness and engaging in the debate, as well as developing an agile strategy, is key to successfully adapting to these new challenges and opportunities.
Recent and future technological advancements demand a rethink of the regulatory environment. In the short term, as auditors increasingly use algorithms to identify outliers for testing there is an urgent need for regulators to reassess the relevance of the regulatory environment and adapt their focus. This means that regulators need to work closely with audit firms to understand the experiments in progress and to make some wholesale changes to regulatory requirements which in turn will shape individual firm methodology and approaches.
Longer term disruptors – such as distributed ledgers – will require a completely new regulatory environment and accounting standards to ensure consistency of approach around verification of ledgers, validation and recording of transactions and the role that oracles play verses auditors.
If we want something that is going to support technological developments and be a meaningful and appropriate regulatory environment, we must ensure that we do not simply try and shoehorn the new technology/approach into an existing framework. There needs to be a transparent process and mechanism for developing these new frameworks with input from all key stakeholders.
The audit profession can be a big ship to turn and a concerted and proactive effort is needed on the part of regulators, standard setters and audit firms to make this change happen. There is a risk that existing laws and regulations will act as a barrier to the pace of change and therefore action is needed now to start the cogs of change.
Technological change and its impact on internal and external audits will also bring challenge and opportunity for companies. For example, boards and audit committees can demonstrate an interest in how technology-enabled their external audit is through supporting technology investment in internal audit.
From a governance perspective, boards and audit committees will need to be appropriately resourced and sufficiently trained in order to understand the impact of technology on companies’ own financial reporting processes, as well as being able to understand and challenge the work executed by auditors.
And, from a practical standpoint, if companies want to benefit from a more effective and efficient audit, they will need to be open to moving towards a more standardised format of financial data to enable analytics capability and cognitive software to be used without the prohibitive barriers of complex data manipulation which is often the case at present.
The investor community also has an important role to play. The clearer this community can be on what information they need, when it is needed and what level of assurance is required, the greater the chance of success.
Investor needs can be met through more innovative, timely and relevant financial reporting, enabled by the types of technological developments highlighted above, but engagement and clarity of needs is key.
Significant change is coming and offers a huge opportunity for the profession to be more relevant and trusted than ever. This prize will require us to embrace change and to train and to develop people with a different range of skills and abilities.
While the broad business training that qualification for the ACA provides is still considered a valuable asset by graduates, there is a risk that the profession is still perceived by the majority to be very narrow in its graduate selection and required skillset.
For the future, the mix of skillsets is critical. The profession will need people who have accounting skills but who are also extremely IT literate. Analytical capability is coming to the fore – and also the ability to code and work with a range of new technologies. To meet this opportunity there are already some examples of audit firms recruiting in a broader way than they have done in the past and this trend looks set to continue.
Added to this is the potential to use the crowd to deliver audit tasks – a future that will be enabled by technology platforms and which will bring a whole new dimension to the flexible and agile audit workforce.
Future audits will be of a higher quality enabled by technology, but this is only part of the equation. Highly skilled humans will always be needed to interpret the big data, report and to interact with other humans on key judgement areas and provide assurance around the new technologies which are generating the data.
Technology is not a silver bullet – it is only as good as the data underneath. While the day-to-day responsibility of the auditor may change, the opportunities for our profession are greater than ever.