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Tomorrows Audit

Tomorrows Audit

To infinity and beyond: how technology is changing the face of audit

Will audit still be relevant in the years to come and will auditors still be able to deliver added value? We asked these two questions to those who actually practice audit: our own auditors, across all grades and countries . Not only did they all reply with a resounding “yes” to both questions, but they also all agree on the need for audit to change dramatically. In a globalised world where technology is progressing at an unrivalled pace, audit practices cannot remain the same as they were twenty or thirty years ago. In fact, all the auditors we interviewed express the same viewpoint: audit professionals and firms need to quickly and fully embrace technology and harness its opportunities if they want to continue to play an exciting and integral role in tomorrow’s economy.

Let’s not shy away from reality: if audit firms fail to wholeheartedly harness the potential of technological developments, the outcome could be dreary. According to the Institute of Chartered Accountants in England and Wales (ICAEW) the profession would then “at best become less relevant, and at worst, not remain in business at all”2. In his April 2017 address during the PCAOB/AAA Annual Meeting, board member Steven B. Harris sounded a wake-up call: “Over the years there has been a growing concern that audit is perceived as a commodity by many of its users and, as a result, is losing its relevance. There seems to be a general awareness, at least amongst the largest firms, that for audit to remain relevant it must adapt to the changing needs of investors3.

The impact of technology on audit

Judging by the answers we received from our panel of auditors, however, it seems the call has been heard. As a matter of fact, audit and accounting firms are thought to spend an estimated $3 to $5bn on technology every year.  And this will only increase. “Technology will have a massive impact on the workflow of audit and the way we perform our audits. The objective of audit will remain untouched, but how we get to our conclusion will change drastically.” says Wihann Rabe, a senior manager in Mazars’ Cape Town office in South-Africa.

Will these changes be for the better? What appears to be certain is that the impact of technology will be massive – most likely greater than any the profession has experienced so far. And some of its most notable effects may not be benign. In a recent publication, market research company Forrester says “automation will displace 24.7 million jobs by 2027. This equates to a job loss of 17% between 2017 and 2027”4. Gartner research, carried out in 2013, showed there was a 93% likelihood that part of current audit and accounting work be robotised by 2030.  So for a profession that is deeply rooted in tradition, appears largely disruption-averse and operates within strict regulatory constraints, there seems to be legitimate reasons to be afraid. Auditors themselves do not disagree. David Herbinet, Head of Audit for the Mazars Group, explains: “Obviously, the digital revolution will significantly impact our jobs. But the plus side is we will have to use our people for more value adding tasks”.

Technology as an enabler

Indeed, if the impact of technology cannot be denied, all the Mazars auditors we interviewed, see it first and foremost as an enabler, something that will provide new tools that will make their job both more interesting and more relevant.

From Rotterdam, in the Netherlands, Antoine Kortekaas shares this optimistic perspective: ”I think technology will change the way we will perform our audits and give us chances to develop our profession.” In London, Justin Rodrigues is also confident that “technology is going to play a major role in enabling our staff globally to perform their work better”.

“Technology should not be considered as a threat only. It could also offer new opportunities to improve the efficiency and transparency of the audit work, as well as a higher quality of service to our stakeholders”, says Daniella Ricci, an audit senior manager in Milan. Her sentiments echo the idea that there will always be a need for skilled, human auditors who can apply sound judgment. Arguably, this is even more important in an increasingly technology enabled world. “The most dramatic impacts on our profession will be the technical automatisation of repetitive and manual tasks and the analysis of big data”, says Pierre Zapp, Head of Audit at Mazars in Germany. ”And this is also very good news: we can concentrate more on tasks where thinking is a game changer.”

 

 

Prominent technological breakthroughs

What exactly are we talking about when we refer to technology? Or more accurately, what technological advances will transform the work of auditors and the audit profession?

When asked, Mazars’ auditors first single out artificial intelligence, or AI. This field involves any computer system that is developed to perform tasks normally require human intelligence, such as visual perception, speech recognition, decision-making, and translation between languages5.

Even though the concept of AI is far from new, it is now being explored and developed in a broad range of industries, ranging from healthcare to automotive, advertising or banking. It is then no surprise that audit is also exploring the opportunities AI could provide.

“I’m not sure AI will be particularly disruptive”, says André Louw, a senior manager from Mazars in London. “But I’m certain it will have an undeniable impact, and it will be a massive help for audit firms.” In Germany, Zapp is a little more specific. “I expect artificial intelligence to help us in the field of predictive analysis”. Other examples of AI-related improvements may include natural language processing and the use of advanced machine learning techniques, which will enable auditors to quickly process, highlight, and extract key information from electronic documents. According to the ICAEW, “they will then be able to assess a far broader population set in its entirety, and focus their effort of key items of interest and insight while the repetitive or low judgement area of extraction is automated”.

To our auditors, blockchain appears as another potential disruptor, one that generates high expectations. In its current definition and most widespread use, a blockchain is a type of database known as a distributed ledger that is decentralised, meaning it has no central administrator. Every transaction that is entered in the database is time-stamped and recorded on a block, and each data block on the ledger is linked to the previous one by a cryptographic algorithm. As the distributed ledger is both shared and encrypted, it offers a high level of safety. Which is why, in a near to medium future, the blockchain concept, or parts of it, is likely to be incorporated into the way in which companies transact.

In the longer run, blockchain might have the power to transform all financial transactions, and make them self-verifying, meaning that someone auditing the recognition of revenue from any 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 rather than having to wait until the end of the year to assess the impact of an entity’s transactions on their financial statements, auditors could analyse it as contracts are created – and even before transactions take place. They would then also be able to quickly flag any misstatement (either due to fraud and error) and perform “real-time” auditing. This obviously would open a new era in the areas of transparency and financial reporting, with a ripple effect for auditors.

Clearly, such developments will take time. The use of distributed ledgers still remains experimental and the scalability of such solutions is still under question. But the innovative and disruptive potential of blockchain is undisputed, even though its proper use will require audit firms to make sure they can harness it.

“For an audit firm”, says Rabe, “it will be key to ensure that audit managers and partners are fully equipped with the knowledge and workings of something like blockchain. We will only be able to capitalise on the advantages that come with new technology if we are comfortable with its workings and impact on the audit process. We also need to ensure that the firm embraces technology at a global level. We can easily become inefficient and non-compatible if technology and its uses is not embraced from the top down.”

New hires with different skillsets

Embracing technology is certainly a matter of mindset, but also of expertise. Being able to harness the potential of AI or blockchain will obviously require audit firms to bring in people who know how to do it. “We will have to hire young graduates with different profiles, explains Herbinet. “We have already started to look for data scientists, people who can analyse data. As a matter of fact, we will need to acquire different sets of skills.” Virginie Chauvin, the Head of Audit for Mazars in France is on the same wavelength: “Technology may help us save time on certain tasks like data processing, checks on financial disclosures, confirmation process, or the preparation of analytical reviews. This probably means that we have to rethink the profiles of the people that we need to hire and also the volumes.” Audit firms like Mazars will see a significant shift in our staffing pyramids. “More senior people will be required to interpret findings and apply the required professional scepticism, with an impact on the current situation of lots of junior staff. This raises the question as to where these senior people will come from, given that less will be trained”, says Louw. “At the end of the day, I can see in reduction in junior staff, but senior staff will become increasingly important to ensure professional scepticism is appropriately applied.”

So fewer people, but more specific expertise? Engineers and IT specialists rather than management or business school graduates? “I do not see this as a problem”, says Ahmed Shawki, Mazars’ managing partner in Egypt – and himself an engineer by trade. “It’s easy to teach accounting to engineers and IT people”.

 

 

Factoring in stakeholders’ expectations

Clearly, from all angles, the pressure on audit firms is high and continues to mount. Competition will increase as “all major players in the auditing world will try and outdo each other in the race for technological improvement”, says Louw.

But it seems audit professionals are not the only ones who hold the keys to the successful integration of technology into audit approaches and processes. To Oelze, the crucial elements will be acceptance and support from many stakeholders.  “Once sophisticated algorithms, or even AI, are implemented in audit, it will no longer be possible to provide a distinct trace of the input data to the output”, he says. “No one will be able to thoroughly understand the underlying algorithms. Eventually, it will be much about the public acceptance of such new approaches. It will be whether the public and the regulator accept audit results derived by non-traceable algorithms. This is a significant disruption, but not unimaginable. The public already accepts results provided by Google, Amazon or Instagram which are based on non-comprehensible algorithms.”

So evidently, the much needed or even indispensable technology-driven transformation of audit will have to be championed by more players than just audit firms and auditors. Of course, they will need to continue to invest and experiment in new technologies and new expertise. They will need to transform their models and engage in the debate. But professional organisations will have to promote and foster the dialogue needed to allow auditors to use technology. And they will need to make sure professionals training requirements are in line with the new sets of skills that audit will require in a near future.

 

Regulators will have to step in and work in close cooperation with audit firms to have a clear understanding of the experiments in progress and develop new frameworks that will shape the audit methodology and approaches in the future. These upcoming changes in regulation must be the result of clear and transparent processes, in which all key stakeholders can provide their input. “Regulators and standard setters will need to act more proactively than they have done in the past”, says Herbinet. “With the current pace of technological progress, it’s becoming impossible to just react to changes”.

Companies and their boards and audit committees will need to keep up as well. That primarily means being trained enough to fully grasp the impact of technology on financial reporting. They will also have to agree to move towards a more standardised format of financial data, so that new technology can be used effectively.

The financial community, lastly, has a major role to play, as well. The clearer investors will be on what information they need, when they need it and the degree of assurance they require, the greater the chances of success.

1Internal survey conducted in November 2017 via a questionnaire open to all auditors working at Mazars worldwide, complemented by direct interviews.

2 https://www.icaew.com/en/technical/audit-and-assurance/faculty/the-future-of-audit/the-future-of-audit-technology

3 https://pcaobus.org/News/Speech/Pages/Harris-statement-PCAOB-AAA-4-20-17.aspx

4https://www.forrester.com/Forrester+Predicts+Automation+Will+Displace+247+Million+Jobs+And+Add+149+Million+Jobs+By+2027/-/E-PRE9745

5 https://en.oxforddictionaries.com/definition/artificial_intelligence

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