Breakthrough hardware. Innovative software. Improvement of everyday life through technology. Similarly for auditing, incorporating technology is inevitable.
If we embrace new technology, we believe that auditors of the future will play an increasingly important role in society. Such as bringing forward looking insight, trust and human judgement. Working hand-in-hand with but not replaced by technology.
To move towards this future all stakeholders – audit firms, regulators and standard setters, companies, investors – must engage and collectively drive forward this transformation.
Future audits will be of higher quality enabled by technology, but this is only one part of the equation. Highly skilled people will always be needed to interpret the big data, coding (python the more common these days) to make sense of the data and key judgement areas. Providing assurance around the new technologies becomes a reality.
Technology is not a silver bullet – it is only as good as the data underneath.
Let’s begin discussing the impact that the new generation audit has on its stakeholders.
Implications on Stakeholders
Audit is a profession that is steeped in tradition, surrounded by frameworks and concern for regulatory challenge. It is going to take a lot more effort to embrace and proactively respond to the opportunities and challenges that the digital and technology revolution will bring.
Some of the biggest hurdles will be around responding in an agile way and having a forward looking mind-set.
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 technology advancements then the traditional audit services and audit firms are wide open to challenge from the more agile start up 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.
What should clients expect from our audit services? Firstly, an automated or real-time audit approach will eliminate many of the mundane tasks. This change would allow audit teams to focus on higher-risk areas and delve deep into the client’s business to provide valuable market insights and value. Most importantly, business advice that would actually help clients. Especially higher-level strategic decisions that would affect the firm in its entirety.
In a risk-based audit approach, the overall quality of the audit engagements would improve. Auditors would have more time to consult, guide and deliver value to clients.
Automated or real-time audit means that we will be conducting a 100% population test of transactions in the given financial year. Test of details’ no longer a choice. Sampling may no longer be relevant. If transactions are tested daily or weekly, exceptions can be brought to the client’s attention throughout the year.
There will be minimal testing performed at year end, allowing for timelier sign-offs of financial statement. The value delivered by an audit should increase significantly and potentially increase operational efficiency for clients.
While the broad business training that a fresh graduate gets during their undergraduate years are still useful, there is a risk that it is still perceived by the majority to be very narrow in its required skillset.
In the future, the mix of skillsets are critical. The profession will need people who have accounting skills but also possess the skills of IT literacy and analytical capability. They may also need the ability to work and perhaps code with a range of new technologies. To meet this criterion, perhaps universities could tailor their undergraduate programmes to meet the demands of the future.
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.
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 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.
Regulators and standard setters
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.
While digital developments are progressing exponentially, there is a high level of uncertainty about what technologies are really going to be over the coming years. However, it is clear that digital technologies will have an impact on auditors, and auditors would have to rethink their audit approaches and possibly their profession as a whole.
Auditors should therefore be forward looking by defining a digital strategy, explore experiments, and perhaps drive a culture of innovation. Sticking to the traditional methods will not work.