Deloitte & Touche chairman and CEO Joe Ucuzoglu, who leads Deloitte’s audit practice, is preparing the firm for the audit demands of the future, with the help of sophisticated technology.
“At Deloitte we’re investing several hundred million dollars in data analytics and artificial intelligence with some cutting-edge applications that we really believe differentiate us and our audit approach,” he said in an interview Friday. “When we use these tools, we’re able to get greater coverage. We’re able to more quickly identify risks. We’re able to complete the audit with a higher level of quality and ultimately deliver a greater level of insight to our clients.”
The firm published the results of a survey Wednesday in which it polled 150 financial statement users, including investors, along with 50 audit committee members and 50 financial statement preparers, in late 2014 about what they would like to see in the “audit of the future.”
More than two-thirds of all the respondents agreed that the audit profession is fundamental to maintaining confidence in capital markets by providing assurance that financial statements are free of material misstatements and companies’ systems of internal controls over financial reporting operate effectively. However, 46 percent of the audit committee members surveyed and 59 percent of the financial statement users who were polled said they would like the audit profession to be more proactive in addressing evolving demands.
“There is a recognition in the marketplace that the current audit is very valuable,” said Ucuzoglu. “In other words, the stewardship and confidence associated with assurance—that the financial information that companies report annually is accurate and correct—is very valuable and critical to the effective functioning of the capital markets.”
Given the constant changes in the capital markets and technology, audit firms such as Deloitte need to evolve in order to keep pace. “There were a couple of key themes that came out of this, one of which is that we really need to be leveraging advanced technologies to enhance the effectiveness of the audit process,” said Ucuzoglu.
All of the survey respondent groups appear to believe that offering expanded assurance would be valuable to capital markets if it were provided on information beyond traditional financial statements, such as earnings releases, investor presentations and risk factors.
“There is a recognition in the investing community that more and more of the information they are relying upon is not contained within the historical financial statements that we audit,” said Ucuzoglu. “A lot of the information is being communicated through press releases and investor presentations in many cases. These are non-GAAP measures and key performance indicators that investors desire, and these measures are moving markets, but they’re not part of the traditional regulated financial disclosures that are subject to audit. As a system, we along with the regulatory community are going to need to look at whether we need to expand the attention that’s paid to these other sources of very important market-moving information.”
Nearly 70 percent of the audit committee members and financial statement preparers surveyed by Deloitte indicated they believe there are significant benefits in auditors using advanced technologies. In addition, virtually all the survey respondents strongly agreed that more advanced technologies should be used in audits.
However, while 70 percent of the audit committee members and financial statement preparers polled said that audit’s adoption of innovative technology and process improvements is keeping pace with their industry, only 45 percent of financial statement users agreed.
The use of data analytics is an increasing trend at Deloitte and the auditing profession at large that is spreading to educators at university accounting departments. “It has important implications in terms of human capital and the skill sets that the auditors of tomorrow will need to have to be successful,” said Ucuzoglu. “We’re having an active dialogue with the university community. The importance of understanding data science and information technology is a critical skill set to the auditors of tomorrow. It has important implications in terms of how we go about performing our audit procedures and redesigning our audits to take advantage of these enhanced analytics capabilities. Throughout the profession, there’s a focus on this. What we’re trying to do is invest out ahead and use this as a competitive advantage.”
Advanced technology could also help audit firms deal more efficiently with the expanded disclosure requirements coming out of the Public Company Accounting Oversight Board. Accounting Today asked Ucuzoglu what he thought of the PCAOB’s recent proposals about audit quality indicators and a new disclosure form that audit firms may need to start using for identifying engagement partners on an audit (see PCAOB Proposes Form for Disclosing Audit Engagement Partner and Suggests Audit Quality Indicators).
“We’re very supportive of the PCAOB’ s exposure of these audit quality indicators, and in fact we’ve already been piloting them on some of our clients,” he said. “The real objective here is we want companies to select an auditor based on considerations of who is able to deliver the highest level of quality. In order to do that, clients need metrics that might actually help them understand the level of quality they’re getting through the audit process. These audit quality indicators help provide an informed view to audit committees as to the level of quality that they’re receiving from the audit firms, so it is very, very positive.”
Ucuzoglu also has a positive view of the PCAOB’s proposed disclosure form for audit engagement partners. “We understand that investors desire this information, and we’re in the business of transparency, so we’re certainly supportive of meeting the investors’ appetite, and we’re encouraged by the proposal that the PCAOB put forward,” he said.
He believes technology can help with the PCAOB’s stated goals of encouraging greater professional skepticism, objectivity and independence on the part of audit professionals.
“It frees up the auditor so some of the more routine tasks can become automated,” said Ucuzoglu. “The auditor has more time to spend on the subjective judgmental areas and really exercise a degree of skepticism and probing by virtue of having the time freed up from lower value-added tasks. It also arms the auditor with better information with which to make those judgments. By virtue of having profiled the population and run these advanced analytics, when the auditor does evaluate the subjective judgments, they have more information and tools at their disposal to probe and ultimately form an independent view as to the propriety of the amounts.”
Audit Committees and Investors
Advanced technology can also help audit committee members on the boards of public companies by making the reports more understandable and giving them new ways to assess the information.
“The audit committees of our clients have been highly encouraging of us deploying these technologies,” said Ucuzoglu. “Ultimately they receive better-quality feedback and insights when we’ve deployed these tools on the audit. They’ve received a higher-quality product.”
Investors too can benefit from audit technology advances. “Ultimately the investor is the beneficiary because if the auditor has performed the audit at a higher level of quality, then the investor can be more confident in the ultimate financial information that has been reported,” said Ucuzoglu.
He was also asked about how Deloitte’s audit practice is faring this year. “Overall we’re experiencing a very positive trajectory,” he said. “We’re seeing clients selecting audit firms based on quality, and we’re certainly benefiting from the fact that we’re experiencing a very positive quality trajectory that is evident in our recent PCAOB inspection reports, where we’re seeing the benefits of having made significant investments in quality. Obviously we’re continuously looking to improve, but we have made very significant quality gains over the past few years.”
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