Audit technology is advancing at a rate that suggests companies need to start thinking hard about their own technological capabilities to stand up to the audit process.
“It’s changing the way companies engage with us, the type of data we ask for, and what information we need,” says Roger O’Donnell, a partner at KPMG who heads up the firm’s use of data and analytics in audits. “Companies should be thinking about this in terms of how it impacts them.”
There’s plenty of hype and buzz over the future state of technology in business, and it’s present in audit circles as well, says Hermann Sidhu, global assurance digital leader at EY. “Artificial intelligence is going to be huge,” he says. “Blockchain is forever in the news. But audit firms can’t move by themselves. It has to be in conjunction with clients.”
Before artificial intelligence can become a true factor in the audit experience, companies need to get their data in order, says Sidhu. “We are moving to place where data is driving the audit,” he says. Audits are already moving in some cases away from sampling to the analysis of entire populations of data, which makes it infinitely easier to identify outlier transactions that merit closer scrutiny by auditors.
Analytical tools fall into four separate buckets, says Mike Baccala, U.S. assurance innovation leader at PwC. They can be descriptive, diagnostic, predictive, and prescriptive, he says. Descriptive analytics provide hindsight. “It’s about what already happened,” he says. “That’s what is most prevalent today.”
Diagnostic analytics provide more insight, says Baccala, helping to identify why something happened. Predictive analytics provide foresight, which is the leading edge of analytics technology today. “That’s where a lot of people are trying to go now,” he says. “It uses different methods — stats, math modeling, artificial intelligence, machine learning, deep learning algorithms. It gives you probabilities based on data.”
Prescriptive analytics is even more advanced, says Baccala. “It’s about differentiation,” he says. “It will present choices based on a model. It adds more timely data and adds a feedback mechanism. It operates much like machine learning would.”
“Analytical tools fall into four separate buckets: They can be descriptive, diagnostic, predictive, and prescriptive. Descriptive analytics provide hindsight. It’s about what already happened. That’s what is most prevalent today.”
Mike Baccala, U.S. Assurance Innovation Leader, PwC
PwC is using more than 50 different types of analytical tools in its audit processes today, says Baccala, so it’s not all science fiction. The firm uses a revenue matching tool that uses data from the entire revenue subledger and matches it to sales, shipping invoices, and cash receipts, for example. “It’s doing very complex matching, and it’s doing that through all the transactions that are in the population, not just a sample,” he says. It quickly isolates transactions that are higher risk.
The firm uses a similar tool to analyze depreciation expense, says Baccala. Auditors take the data companies used in their own systems to calculate the expense and perform an independent calculation to see how it compares.
The use of analytics represents a “tremendous upside” in performing risk assessments, says Jon Raphael, chief innovation officer for Deloitte’s audit practice. Giving auditors the ability to visualize entire populations of data enables auditors to more quickly hone in on the risks that matter most, he says. Auditors are using tools that look not just at data generated by the client, but data from other public filings as well to look for risks. “This is powerful stuff,” he says.
Raphael says the advances in audit technology are driving a critical need for auditors to become more digitally connected with the public companies they audit. “How do we interact with clients to get information?” he says. “This is the pivotal to the digital audit.”
At least among the Big 4, audits are moving into shared systems where auditors within the global networks are all connected. It’s not unlike a multinational company having one enterprise resource planning system throughout its entire organization, says Sidhu. “All of our 80,000 auditors are on one global platform, and it’s all online,” he says. “No matter where they’re working, they’re all connected into one platform.”
Wes Bricker on distributed ledger technology applications
Let me now turn to technology. Neither the accounting profession nor ourselves as regulators control changes in technology that affect commerce, but each of us can control how we seek to understand, prepare for, and respond to these changes. We need to begin this process by “lighting a lamp,” if you will, and using it to see what is happening around us. This morning, I want to discuss one such lamp that we, in OCA, have recently lit. This lamp is allowing us to better see the emerging area of distributed ledger (blockchain) technology for its impact on financial reporting.
In the near term, our interest in blockchain technology applications stems from the fact that the sponsors of this work may be utilizing capital from investors, in particular our Main Street investors, to develop possible applications in light of the fact that financial information is important to investor decision making. Thus, OCA is investing time to understand blockchain technology applications such as cryptocurrencies, coins, tokens and so forth as they are offered, bought, held, sold, and traded. I suggest that it is warranted for the accounting profession to also invest time in understanding these areas. I have not heard particularly good rationales for turning off—or never turning on—the profession’s lamps at this time.
While the OCA Staff is working to better understand this area of blockchain technology applications, we are indeed journeying with a compass; namely, the Commission’s existing accounting and auditing requirements, books and records requirements, auditor independence rules, and the federal securities laws more generally. These collectively form a framework for us, and they should as well for everyone, because these requirements apply to all matters within the purview of the SEC, even if they were developed prior to the emergence of the types of facts and circumstances, including blockchain technology applications. In this vein I also refer you to the remarks that I made in September, in which I spoke about these requirements as they relate to capital raising that involves so-called coins or tokens.
I understand that many of your organizations and many others may be currently undertaking research and development related to blockchain technology and its applications. I realize that none of us can foresee exactly how these technologies may be developed and applied in the coming months and years. Nonetheless, let me conclude by emphasizing that, as with the OCA Staff, I think it is important that those in the accounting profession invest the time to understand new trends and developments in technology and commerce to identify their potential effects on financial reporting to investors. I look forward to the meaningful dialogue that will result.
Audit firms are also making progress getting their clients connected into platforms that facilitate the exchange of data and information between auditors and preparers. At Deloitte, they call it “Deloitte Connect,” says Raphael. It’s an online project management system used both by the auditors and the audited companies to facilitate the sharing of information.
The public companies they are auditing, however, are not as connected internally. Companies, especially multinationals, may have dozens or even hundreds of disparate ERP systems, making digital collaboration more complicated. “As companies harmonize their ERP systems and harmonize their chart of accounts, it makes it much easier to move to an analytics approach,” says Sidhu.
Blockchain represents an area of technology that promises to help companies get more connected, and not just for audit or even for financial reporting purposes. Blockchain is a digital ledger that is shared by everyone with a stake in it. Encryption provides both confidentiality where it’s needed and a distinct record of every entry. “We all have access to the information, and it can’t be changed,” says Raphael. “That’s a big deal.”
A number of companies are experimenting with blockchain, says Raphael, with the financial technology sector leading the way with piloting. “There are definitely companies that are ready to scale,” he says. “The average auditor is not seeing much blockchain yet, but we will see more in the next year or two.”
The digital structure of data in a blockchain creates huge potential for increased use of analytics, says Raphael. Not only will blockchain significantly reduce the complexities of reconciling data, but the layering on of analytics will make the identification of outlier transactions even faster and easier.
Some have even mused over whether blockchain technology could lead to the obsolescence of auditing. Baccala doesn’t think so. Information entering the blockchain will still need to be subject to controls, processes and procedures, and there will still be human judgments around those inputs. “Blockchain will change certain aspects of how we get to an audit, but it won’t replace the audit,” he says.
Still there are plenty of technological challenges to operationalizing blockchain for financial reporting and auditing purposes, not the least of which is the ongoing escalating threat of cyber breach. “We still need an appropriate infrastructure with controls and monitoring,” says Raphael. “That’s going to be sorted out as we go forward.”
The Securities and Exchange Commission is tuned into blockchain developments, studying how it is evolving as a platform for digital currencies, like bitcoin, and considering how that might translate into the financial reporting environment. During a recent speech, Wes Bricker, chief accountant at the SEC, said SEC staff is “journeying with a compass,” namely the existing accounting, auditing, and books and records requirements that won’t change.
"These collectively form a framework for us, and they should as well for everyone, because these requirements apply to all matters within the purview of the SEC, even if they were developed prior to the emergence of the types of facts and circumstances, including blockchain technology applications,” said Bricker. “It is important that those in the accounting profession invest the time to understand new trends and developments in technology and commerce to identify their potential effects on financial reporting to investors.”