American Institute of CPAs president and CEO Barry Melancon challenged the leadership of the profession to embrace technologies like blockchain and cognitive computing that are going to have a major impact on accounting – and in particular, he called on them to join in the transformation of the audit.

Speaking at the Spring Meeting of the AICPA’s Governing Council in Arizona on May 21, Melancon gave those in attendance a serious charge: “We have an obligation to keep pushing these technologies and embedding them in the profession,” he said. “Our job is to bring as much of the profession forward as we can in this environment.”

While he discussed cognitive computing, robotics and data analytics, he focused on blockchain in particular, citing a survey that suggests that half of CEOs expect the distributed ledger technology to fall in the bailiwick of finance and accounting, where he expects it to have an enormous impact.

“We don’t need to really understand the underlying software,” he said. “It’s the implications and power of blockchain that are more important that the actual software.”

For those who are concerned that blockchain -- with its promise of a digital ledger that essentially audits itself – will disintermediate auditors, Melancon pointed to the need for outside experts to attest to the reliability of the blockchain. “There are going to be public blockchains and private blockchains, and we may need to create a new kind of SOC report around blockchains and whether a blockchain is achieving what it’s supposed to,” he said.

He illustrated the potential by referring to the switch from SAS 70 reports to the family of SOC reports. “It was so emotional to move away from SAS 70 -- we had to brand SOC reports as ‘formerly SAS 70’ so people could wrap their heads around the change. But firms are now doing thousands and thousands of SOC reports – we even have a Top 100 Firm where that’s all they do.”

He reported that the institute recently hosted a profession-wide symposium on blockchain, and tasked a number of working groups to report back on various issues in the fall. “That’s a little quicker than in the past,” he acknowledged, “because blockchain’s not going to sit around and wait for our working groups to report. Instead of thinking, ‘We have to get these things perfect before they go out the door,’ we need to accept that things will be iterative.”

“If we wait for perfect, we’re going to miss it,” he warned.

AICPA president and CEO Barry Melancon
AICPA president and CEO Barry Melancon

Transforming the audit

Incorporating technology but also moving beyond it, a central part of Melancon’s message revolved around the coming transformation of the audit, and the institute’s role in leading that transformation.

To start, he recalled the institute’s decision three to four years ago to begin focusing on improving audit quality. “We needed to move the needle without breaking the gauge,” he said. “We have asked a lot of state societies from the peer review perspective, and we’ve asked a lot of individual peer reviewers, and we’ve created new approaches, new oversight and new guidance that have improved audit quality.”

The results, he reported, have been very positive, with 86 percent of firms demonstrating improvement. “It’s not perfect,” he said, “but directionally we clearly see a difference in quality.”

That improvement matters not just for the immediate benefit of audit clients and the public markets. “It’s important to remember how strategically and reputationally import audit quality is,” he said. “But audit quality is also an important issue when it comes to transforming the audit. The market won’t give us permission for this if they don’t trust us on quality.”

He noted that the profession had two pathways open to it: to attempt to merely streamline and improve the current audit – or to come up with “an entirely new approach to audits.”

In consulting with the profession’s leaders, the institute discovered a clear preference for the latter. “And the overwhelming response was that the AICPA has to lead the transformation in audit,” he said.

One of the institute’s initiatives in this area is a new tool for preparations, compilations and reviews that will be unveiled at the institute’s Engage conference in mid-June. “It will use cognitive technologies to examine your responses to certain questions and indicate areas where you might have made a mistake,” Melancon said. “It will also use AI to take the information you’re putting in and put it into Word in the appropriate engagement letter.”

Created in a partnership with CaseWare, it’s the first step and a test case in the longer-term creation of what Melancon described as a “dynamic audit solution.”

“The larger firms need to see the value in this and make the necessary investments,” he explained, noting that the DAS would be a $50-$60 million project, with half those funds already pledged by firms in the Top 500, and particularly the Top 100. “They can’t do it on their own; it’s a consortium approach. The results will be available to all. These are firms that compete with each other, but they understand the importance of it from a profession-wide perspective.”

Building the tool will be one thing, he warned; convincing the profession to get behind the transformation of the audit will be another. “There’s an unconscious bias in the way we think,” he said. “I was sitting next to the CEO of a major firm recently, and he told me, ‘We absolutely need to transform auditing, and I guarantee that 100 percent of my line partners in audit will disagree with it.’”

That only underscored Melancon’s charge to the Council members: “We really are a profession with limitless possibilities -- if we can push the profession to think about the opportunities and take chances,” he told them.

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