The audit profession is slowly retooling itself for the modern IT age, after many years of reliance on random sampling and manual methods that are now failing to meet today’s expectations for precision.
For starters, auditors are beginning to adopt advanced technologies that could eventually make sampling of transactions obsolete. “As the systems continue to improve, as data becomes more standardized, the idea of the auditor essentially monitoring transactions as they are posted in client systems is going to reach critical mass at some point,” says Rick Ueltschy, managing partner at Crowe Horwath.
Data analytics has been around for a while in the audit profession, says Joanna Schultz, national director of audit technology for Mayer Hoffman McCann, but its use is growing every year. That enables auditors to replace manual auditing procedures with more data analysis. “Ultimately, this is how the industry will finally achieve its long-term goal of continuous auditing,” she says.
Certainly, the audit profession has heard the marching orders of its regulator, the Public Company Accounting Oversight Board, which has delivered harsh inspection findings to all the major firms in recent years. The PCAOB is demanding more compliance with auditing standards, especially standards around internal controls, accounting estimates, and revenue recognition. The board is also looking for more precision in auditors’ assessment of and response to risk of misstatement.
That has sent the audit profession on a mission to redefine itself, and technology is a big part of the answer. “Our mantra is to simplify, standardize, and automate virtually everything we do,” says Bill Brennan, a partner and audit transformation leader at PwC.
“A lot of skills that will be required to do the data analytics and use the information technology that are available are not the skills that the traditional auditor is trained in. That goes to the question of what will the audit firm of the future look like?”
Lewis Ferguson, Member, PCAOB
Jon Raphael, chief innovation officer for Deloitte & Touche, sees the change as more a shift in the culture of auditing than a specific initiative to implement. “How can we re-examine all the steps in the audit process and look for new ways we can deliver?” he says. “The notion of innovation is a key part of our strategy. I would hate to say this is directly correlated (to inspection outcomes), but it is contributing.”
To some extent, auditors are piggybacking on the significant investments their clients have made into systems of their own to better manage their own data and operations. “We’re somewhat the beneficiary of those investments,” says Roger O’Donnell, global head of data analytics in audit for KPMG. “We can use data they’ve been collecting to help us facilitate and perform a higher level of precision and quality in the audit.”
Procedures around revenue recognition, for example, can look at entire populations rather than samples, and can look at every stage of documentation—shipping information, invoicing, accounts receivable, ERP data, cash receipts—to see the entire story, even giving better insight into aging receivables. “Are there anomalies or outliers we want to examine further?” O’Donnell says. “Could it be a controls problem? A process problem? Errors or mistakes? Or fraud? All of those become easier to identify, more precisely focusing on what we see as areas of risk.”
As a foundation for their use of technology, Big 4 firms are developing their own audit platforms. EY’s “Canvas,” for example, is a portal for managing entire audit work streams, helping auditors better identify and respond to risks. “It’s one methodology, one platform, one firm,” says assurance partner Randy Leali. “It enables us to execute on a consistent basis.”
KPMG: AUDIT INNOVATION PLAN
Below is an excerpt from KPMG’s plan to expand the role of audit innovation.
Changing how we operate
Innovation is not always a concept associated with audit. Innovation, however, is at the heart of our strategy for responding to the unprecedented challenges and opportunities we face as auditors. - Larry Bradley, Global Head of Audit
We are changing how we operate, being proactive in listening to our stakeholders and embracing technology and new processes that are enabling us to make audit more relevant and to continue to raise the bar on quality.
Core to our mission as auditors is acknowledging the responsibility we have to society and the capital markets.
Innovating with dynamic audit
We launched ‘Dynamic Audit’ last year, a multi-million dollar initiative to enhance the quality and value of the audit. At the core of Dynamic Audit is an active dialogue with our stakeholders. We have created a unique forum called the ‘Value of Audit’ to hear first-hand what investors, regulators, academics and business executives want from auditors and the wider corporate reporting model. We have already held roundtable discussions in Frankfurt, Johannesburg, Singapore and Toronto, with more to follow.
Our stakeholders have told us they expect more. In particular, they are looking for a broader range of assurance on items that are currently outside statutory financial statements – such as performance indicators, sustainability and other financial and non-financial metrics that drive value for investors. Through Dynamic Audit, KPMG will better understand the broader range of metrics that matter to stakeholders.
Expanding use of data and analytics
KPMG audits continue to be powered by cutting-edge Data & Analytics (D&A) capabilities. And we have undertaken a multi-year investment programs to develop more advanced tools for faster analysis of enormous volumes of data in order to better enable turning data into audit evidence and help uncover added business insights.
Award-winning audit innovation
Another way we are innovating is by introducing ‘Lean’ methodologies into audits. Lean methodologies have been used for years to enhance operational efficiency and business performance, but applying Lean methodologies to the financial statement audit to help enhance audit quality and increase value is a KPMG innovation. A number of KPMG member firms are introducing Lean methodologies into their audits, and the results and responses from organizations have been extremely positive. We are proud that our approach has been recognized as ‘Audit Innovation of the Year’ by the International Accounting Bulletin.
Deloitte recently won acclaim for its Argus platform, at least in part because it adds some artificial intelligence to the analysis of electronic documents. The system “learns” from human interaction and uses machine-learning techniques to help identify and extract key accounting information from electronic documents, like leasing and derivative contracts, employment agreements, invoices, legal letters, meeting minutes, and others. In reviewing leases, for example, “Argus is trained on what’s important in a lease, what can be extracted,” Raphael says.
Easing Up on Old Practice
As auditors increase their use of technology, clients should see some tapering in the effort they put forth to facilitate the audit, Brennan says. “When you think of the days of us requesting hundreds of documents to support an account balance, we can now do some of that work on our own once we get the data,” he says. It also enables auditors to centralize more of the audit work on multinational audits. “We can now leverage data and test journal entries in New York for the entire world of a client. We don’t need someone in China or Brazil to do that.”
The potential outcomes for the audit are significant, experts say. “The result is still an audit opinion, so the end result might not look any different to the recipient of the audit,” says Jim Burton, national partner of audit methodologies at Grant Thornton. “But clearly the understanding and the analysis to get there is deeper. The level and depth of conversations and the areas we look at with a client go far deeper.”
Costs associated with such technologies are a “hot topic,” Leali says. Do audit firms swallow those costs or pass them on to clients? The trend is not yet clear.
“With the use of technology, there’s going to be some manual effort that goes down, but you had that big investment into technology,” Leali says. At PwC, Brennan says the firm’s costs have gone up in greater magnitude than audit fees passed along to clients. “We underwrite those higher levels of cost with efficiencies,” he says.
It’s still early to say what effect continued adoption of technology will have on PCAOB inspection findings, Leali says. It takes two years or more for PCAOB inspection results on a given year’s worth of financial statements to become public. “This is going to take the discussion potentially in a bit of a different direction,” he says. “If you’re documenting what you’re doing, it should be well received in the inspection. The name of the game is how well you have documented what you’ve done and the considerations taken.”
Members of the PCAOB have said they are watching technological innovation in the audit with great interest. PCAOB member Lewis Ferguson says he expects technology to transform the audit process over the next few years, even as it raises questions about existing audit standards. “Will technological innovation result in certain audit procedures becoming effectively irrelevant or redundant or ineffective?” he asks. "Maybe. We just don't know yet. It is not the case today, but it is something we are monitoring."
It also raises questions about audit skills, Ferguson says. “A lot of skills that will be required to do the data analytics and use the information technology that are available are not the skills that the traditional auditor is trained in. That goes to the question of what will the audit firm of the future look like?”
Audit firms acknowledged questions about skills and said they are training audit staff in using new technologies as they emerge. Raphael says Deloitte’s auditors are soaking it in. “The creativity is just flowing,” he says. “People want tools that they believe are effective and provide value.”