After revolutionizing tax and accounting over the course of decades, technology finally looks poised to reshape the third major service of the traditional accounting practice: the audit.
Machine learning, data analytics, ever-more-powerful and mobile computers, and new tools like blockchain will do more than just change the way auditors do their job — increasingly, they’ll change what that job is.
To get a glimpse of what the audit (and auditor) of the future will look like, Accounting Today convened a virtual roundtable of experts in the field. Sharing their thoughts on the future of auditing here are: Mark Baer, managing partner of the audit services group at Top 10 Firm Crowe Horwath; Frank Casal, vice chair of audit at Big Four firm KPMG; Cindy Fornelli, the executive director of the Center for Audit Quality; Joel Shamon, the national audit leader at Top Five Firm RSM US; and Jimmy Thompson, an audit partner at Texas-based MaloneBailey.
Which trends — whether technological, regulatory, economic or otherwise — should auditors be paying the most attention to over the next five years?
Casal: Audit professionals’ work is fundamentally about “trust.” Given the explosion of data and digitization of our lives, the audit profession must evolve its tools and approach to remain relevant in a dynamic marketplace.
Auditors must embrace new technologies. We’re already using data and analytics to manage processes, support planning, and inform decision-making. Cognitive technologies, like robotic process automation and artificial intelligence, as well as blockchain technologies, will become more prevalent over time. These technologies will allow auditors to analyze more complete populations of financial and non-financial data, generate more detailed evidence for evaluation, and enhance audit effectiveness and quality. Technology has the potential to improve audit quality through increased precision and enhance the ability of audit professionals.
Shamon: At RSM, as we look to the future, data analytics and big data will be a big topic, as will the ability to analyze client information — and not just financial information but other external information that will inform the financial statement user.
Another trend we’re looking at is the use of automation and artificial intelligence to perform routine tasks and the initial analysis of client information in the audit. There’s also cybersecurity and the type of technology risk facing the entity in general, and how that relates to the audit. Lastly, there’s the automation of client activities — when will client information exist in digital format, as opposed to just on paper? When that occurs, our audits will necessarily change from the format that they had when the information was only available on paper.
Thompson: The regulatory trends in the public company audit space should be receiving significant attention. The SEC Division of Enforcement’s focus on gatekeepers has resulted in a significant increase in the number of enforcement actions against audit firms in recent years. The Public Company Accounting Oversight Board’s recent Form AP requirement now requires the disclosure of the names of engagement partners in a fully searchable database on the PCAOB’s Web site. The requirement to communicate critical audit matters in the audit report is a current proposed standard by the PCAOB. These recent trends in the regulatory environment make it clear that the regulators desire greater clarity and accountability in the industry.
Fornelli: A key trend to watch is society’s expanding need for trust and assurance. At the core of the auditor’s work is to build confidence by providing an independent and objective evaluation of controls or information. The profession has done this for decades, of course, in the contexts of audits of financial statements and internal control over financial reporting. In the months and years ahead, watch for more areas where companies can tap the confidence-building power of the auditing profession. One such area is cybersecurity, where the American Institute of CPAs has recently unveiled a new framework to help organizations communicate about their cybersecurity risk management efforts. Another is sustainability, where CPAs can provide assurance on the environmental and social indicators that investors increasingly desire and that companies increasingly track.
As these developments unfold, it will remain essential for public company auditors to engage with other stakeholders in the financial reporting process. This engagement allows the profession to stay responsive and adapt to stakeholder needs. One area where we see this engagement clearly taking place is around audit committees. Working with the audit committee community, the public company auditing profession continues to develop tools and resources aimed at enhancing communication and the oversight process.
Baer: As auditors, these trends — technological, regulatory and economic — will continue to challenge our historical approach and ways of thinking, which is a really good thing. The market’s reaction to these trends will ultimately determine the manner in which audits are conducted. As a profession, we are well-positioned to respond to changes in user demand and the evolution of new and emerging measures of organizational performance beyond just traditional financial statements. So many of these changes will be dependent upon our people having the necessary and unique skills to perform these audits of the future. We’re already moving away from the apprenticeship model in the profession and into areas with deeper specialization, centralization and standardization. We’re going through an industry renaissance right now and the opportunities are enormous for those coming into the profession to drive these advancements and innovation.
How do you think the audit of five years from now will differ from today’s audit?
Thompson: Technology will continue to impact the way audits are performed. A remote audit approach and the use of technology like drones, satellite imagery and video calls to perform existence testing will become more commonplace. Cloud computing will continue to eliminate the need for substantial fieldwork being performed at the client’s offices, allowing for reduced travel and greater efficiencies.
Baer: Audits will be much more data-driven. How auditors access, analyze, store and secure data will change with the rise of machine learning and artificial intelligence, among other factors.
To further enhance audit quality, new tools and sophisticated software are being developed to analyze client data and information in new ways with the necessary level of professional skepticism and objectivity.
Furthermore, conducting audits remotely with new technology reflects the modern mobile workforce. The concept of continuous auditing is quickly coming to the forefront, providing our auditors with more timely insights through the use of data mining, data analytics and real-time auditing.
Shamon: Five years from now, we believe that there will be an increased focus on technology that will require different access to client systems. Instead of working with the client’s finance team, we’ll be working more with their IT department to get access to information and to test through transaction cycles. We’ll see an increase in estimates by management, particularly in regards to three upcoming accounting standards on revenues, leases, and allowance for loan losses. These represent significant changes that move the recording of financial statement information from historical or transaction-based to estimate-based. This creates more of a divergence between the operating cycle and how the entity does business, and the financial reporting cycle.
In addition to capturing information on the operating aspects about financial activities, companies will need to document their estimation processes. Auditors will need to audit both aspects, but with an increased focus on the estimation process.
Casal: As data is created at warp speed and businesses become more complex, auditors must remain savvy in data and analytics and have the skills to translate data patterns and anomalies into relevant audit evidence to enhance audit effectiveness and quality. KPMG has focused on developing our auditors for this data age, most notably with our KPMG Master of Accounting with Data and Analytics Program that works with universities to fund master’s degrees for tomorrow’s auditors.
Fornelli: The core proposition at the heart of auditing — building confidence in information — will not change. The way engagement teams conduct audits, however, will evolve along with the relentless evolution of technology and analytics.
Data analytics, artificial intelligence, and access to detailed industry information will all combine to help auditors better understand the business, identify risks and issues, and deliver additional insights. Moreover, the ability to review and analyze entire sets of data, rather than applying sampling techniques, will strengthen the audit.
As auditors harness new technologies, their ability to exercise judgment and professional skepticism will be more important than ever. The profession’s commitment to a continuous cycle of improvement will also serve it well in times of rapid change and innovation.
What about the audit of 10 years from now?
Fornelli: While technology will play an increasingly important role in the audit of the future, the human element will never disappear. After all, an audit firm’s greatest asset is its people, and that won’t change.
Auditing firms have established themselves as leaders when it comes to work-life needs and flexibility, as demonstrated by the profession’s strong presence on lists of the best companies for which to work. Firms will need to continue to explore non-traditional career models and ways to provide employees freedom to move among career paths within the firm and the profession.
What’s more, with the growing importance of information technology and data science to the profession, firms aren’t just competing for talent with other auditing firms or Wall Street —they’re going up against companies like Apple and Google. Audit firms of all sizes should and will continue to seek out those with expertise to leverage technology and the enthusiasm and aptitude to keep pace with continual evolution in this area.
Casal: It is likely audits will be entirely digital and continuous, instead of for a few months out of the year. Technology will allow auditors to analyze and test 100 percent of a corporation’s data, instead of the sampling methodologies utilized today.
Baer: As the technology-driven audit moves toward more automation, IT controls will continue to be a much bigger focus of what we do. Auditors are likely to work in new ways with client departments and teams, including IT, which will provide necessary access to large amounts of data. Companies should start considering how they will provide auditors with more of the quality data sets they have available. It will also be important for companies to harness and integrate information from external sources, as different sets of data could signal changing market conditions that affect their business.
Thompson: Data analytics and artificial intelligence will have expanded roles in the auditing process as those technologies advance. These tools will provide for enhanced fraud detection and risk management, as well as the elimination of some of the manual labor-intensive pieces of an audit. I don’t believe that robots will replace auditors due to the level of judgment required in the audit process, but auditors will need to expand their skill sets to be able to take advantage of the benefits that these technologies may provide.
Shamon: As we look out 10 years, we see a shift in the way companies are evolving, and we see more technology impacting all the activities of our clients. It won’t be a matter of conducting an audit using technology to stay competitive, but rather using technology to capture what clients are doing as a baseline.
We’ll see a rise in service entities over manufacturing entities, based on the desires of new generations and the aging of Baby Boomers. That will translate to auditing through transactions, rather than auditing things, and will increase the use of predictive tools and artificial intelligence to identify trends and anomalies.
We’ll also see a shifting of the core focus of the audit and other attest services — are periodic statements relevant? Can audits become more real-time, or provide assurance on a process or a collection of data that results in financial statements, rather than on a point-in-time financial statement? We’ll see a shifting to more real-time assurance, but also changes in the information investors will ask for, including information such as sustainability metrics.
What sort of effect do you expect blockchain to have on audits in the next five years?
Baer: Capital market spending surrounding blockchain is rapidly increasing and will continue for the foreseeable future. Widespread adoption will surely transform how financial transactions are conducted and the nature of corporate reporting. While there are expected benefits to having an open, shared ledger to trace and verify transactions, there is still a considerable learning curve (and timetable) for those who wish to use the technology.
In order for blockchain to be transformative, it will require nearly universal adoption and standards agreement. It’s likely that change will be led by large industry groups or a legitimatized consortium. While there is growing interest and multiple segmented blockchain pilots, it may take a few years for the industry to collectively agree on an approach and standard that can be universally adopted. This will be the “tipping point,” which will be the catalyst for potentially significant change to audit procedures.
How blockchain is integrated into the banking system and the market’s reaction to that will be telling. It has captured the attention of financial services regulators who still need to address some fundamental risks associated with new payments technology, and a new auditing playbook will follow suit.
Fornelli: Blockchain has the potential to transform the audit as well as financial reporting at large. By streamlining processes and eliminating duplicative work, it can help us create a more efficient and more secure way of conducting an audit while potentially providing better-quality data. Auditors can use blockchain to focus on complex areas that would otherwise require extraordinary resources and staff time. Auditors may be able to test 100 percent of inventory figures, for example, rather than just test samples.
Shamon: Blockchain will impact audits in the next five years as entities embrace the technology. We are already seeing clients using bitcoin, and are having to design audits to account for that.
As other aspects of blockchain are embraced, we will have to focus on the security and reliability of the blockchains themselves. So while blockchain is designed to automatically create transaction flows and trigger events, we will not be able to rely on the blockchain as a source for the initiation of a transaction unless we can evidence that the blockchain is secure and operating as designed. There will remain areas in which activities supported by the blockchain provide the foundation for transactional activity, but not necessarily the estimates related to the completion of financial reporting.
Casal: Blockchain has the potential to change the nature of audit evidence available for large classes of transactions that comprise financial statements. Blockchain technologies may enable auditors to automatically verify transactions through examining digital records rather than invoices, disbursements and other commercial records used today. Utilizing technology to evaluate large amounts of routine transactions will enable auditors and their clients to focus efforts on significant unusual transactions and key estimates and judgments that impact the financial statements.
Thompson: In the short term, the impact of blockchain on audits is likely limited to digital currencies. As the use of digital currencies by companies becomes more prevalent, auditors will need to ensure they understand the methods to audit the quantity and value of a company’s digital currency inventory, as well as the methods to verify payments being made or received through a digital currency.
How about in the next 10 years?
Shamon: If blockchain expands as predicted, it will become the new operating environment of entities, similar to how the just-in-time inventory practices introduced in the 1950s have become standard inventory practice. We no longer ask whether companies use just-in-time inventory; rather, we obtain an understanding of the inventory process and design tests of controls around the process and how transactions flow through the business cycle.
Similarly, we will adapt to testing through the blockchain process. This will shift testing from focusing on the validation of transactions individually, to testing the parameters of the blockchain itself and validating that it is working — which then validates the transactions supported in the environment.
This will fundamentally shift the mix of what is needed from a talent perspective to support a financial statement audit. We will still need auditors versed in GAAP and financial statement preparation, but we will also need many more who are versed in business processes and technology.
Thompson: In the long term, blockchain may change the way transactional accounting records are kept. A shift from a traditional accounting system to companies writing their transactions into a distributed open ledger will result in the availability of verified,
real-time transactional data that is not subject to data tampering. This could potentially reduce the amount of time and resources spent by an auditor on some of the more mechanical steps in the audit process and allow for a greater focus on those areas requiring significant judgements such as contingencies, estimates and impairment.
Baer: It’s not outside the realm of possibility for blockchain to reach the level of the Internet within a decade. We don’t expect this to be a temporary phenomenon. The pace of change is highly dependent upon the industries and companies that adopt it. Financial services was the first to be disrupted and others will certainly follow. Needless to say, blockchain will be pervasive and must be accounted for across business and auditing practices. There are some that theorize the real value of blockchain will be when it is combined with other emerging technologies like artificial intelligence and machine learning. The maturation of each technology independently, let alone collectively, may be beyond the 10-year horizon. However, the transformation possibilities are seemingly infinite in this world of blockchain 2.0.
Fornelli: In the long term, blockchain could allow audit committees and management to receive real-time audits of all transactions. This would provide instant, third-party verification of data to streamline business functions.
While the potential benefits are exciting, it’s important for auditors and others to recognize the potential shortfalls as blockchain is implemented into the mainstream. Nascent technology always presents integration challenges with existing infrastructure. There will also be cybersecurity and privacy concerns before people and businesses will entrust their data to a blockchain solution. Finally, experts warn that since blockchain relies on a widespread network, rather than centrally controlled IT and financial systems, widespread adoption by businesses and governments will be necessary before we will start to see many of the benefits. Blockchain opens a new world of possibilities, but we should be prepared for growing pains along the way.
Casal: In 10 years, it is possible that auditors using blockchain for independent data extraction, real-time monitoring, exception reporting, and unmodifiable evidence will be a regular occurrence. This standardized data will allow for advanced analytics, augmented with artificial intelligence solutions.
It’s important for today’s auditors to be at the forefront of disruptions, such as blockchain, and to identify ways to innovate to advance audit quality and to align auditing capabilities with the changes occurring in the marketplace.
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