The Audit of the Future
Technology has wrought many a change in your average accounting firm — completely revamping tax prep and bookkeeping — but it has had much less impact on the audit function over the past two decades.
That looks likely to change in the near future, however, as the capabilities of technology evolve to the point where it can be more usefully applied to audits, and as software vendors, regulators, corporate clients and the leadership of the accounting profession begin to realize the huge opportunities that will likely become available.
With an eye to the many new audit tools and approaches being developed, we asked a number of experts in the field to comment on where it’s headed and what auditors and their firms need to do to keep up. The panelists in our virtual roundtable are: Susan Coffey, senior vice president of public practice and global alliances at the American Institute of CPAs; Cindy Fornelli, executive director of the Center for Audit Quality; Jeff Gramlich, industry veteran and president of Gramlich Consulting; Frank Mahoney, vice chair of assurance at Big Four firm EY; Brian Miller, a partner in the national assurance practice of BDO USA; and Steven Vertucci, an audit partner at MaloneBailey LLP.
The audit function hasn’t received the same attention from software developers as tax preparation and bookkeeping/accounting. Why do you suppose that is, and why is it starting to change?
Fornelli: The audit function often deals with estimates and judgments that are very challenging, if not impossible, for software to handle. We are beginning to see tools that will help in the execution of audit activities, and those tools have great potential to help with the efficiency of the audit process, allowing the auditor to focus on the more complex and judgment areas of the audit.
Gramlich: The fundamental work effort involved in doing an audit has many different aspects and thus it has been a bit more challenging for the technology companies to develop specific tools as to how to improve this process. However, over the past 15 years or so, the focus around audit automation has been somewhat centered around the audit workflow and helping CPAs manage the staff and audit steps. This was a logical starting point and we have seen several good products developed and enhanced that have advanced the audit process in big ways.
The change that has occurred in the last five years has been the development of tools around the client’s data and the ability to analyze this data in a much more meaningful way. It is important to note that we are really at the beginning of a completely new era in how we will use client data as a profession going forward. With software, it is now possible to have every transaction reviewed and drive even higher audit quality.
Coffey: A number of software companies have developed some really great tools to support audit performance, and some include audit analytics functions. Some of these tools, however, lack integration and many of the apps and scripts available are only as good as the access to the data needed to run them. As access to data has improved in recent years, so has openness to exploring new approaches that leverage technology.
Vertucci: It’s likely that the reason technology for tax preparation and bookkeeping has developed at a faster rate than that for the audit function is because there are more tax returns completed than audits. All people and companies need a tax return but not all companies need audits — there is a greater volume of tax work. Furthermore, regulations are constantly changing from a tax perspective, far more than we see for audit. For this reason, the technology has had to keep up with regulatory changes. Greater attention to developing software on the tax side goes hand in hand with these frequent regulatory changes and higher volume/demand for tax and bookkeeping compared to audit.
I believe that we are starting to see a change as a result of the post-Sarbanes-Oxley world in which we operate. As a result of Sarbanes-Oxley, the Public Company Accounting Oversight Board regularly reviews and modifies auditing standards and, in turn, the AICPA does as well. Changes to auditing standards create an opportunity to develop and change software to ensure that technology keeps up with modifications to auditing standards. We’re seeing more of a push to go paperless, which creates a need for software solutions to operate in a paperless environment and the ability to perform an audit from anywhere.
Miller: Firms are generally armed with two sets of guiding audit principles: those found in the professional literature, and those found within their own firm policies.
While the professional standards have always included a number of significant judgments, one only needs to look to the upcoming revenue standard (and some of the other more recently issued standards) to appreciate the continued and increasing complexity of key accounting judgments. Concurrently, and rightly so, the audit profession is facing increased scrutiny for the manner in which the working papers demonstrate a clear understanding and skeptical assessment of the critical elements within these judgments, as well as a comprehensive understanding of our clients’ processes in making them.
Where firms have the practical ability to deviate from each other is within the space of their complementary firm polices intended to ensure the highest degree of audit quality. I think this flexibility, coupled with ensuring the right tools are chosen or developed to reflect the audit firm’s culture, is why a majority of the larger firms develop their own platforms in house.
How is technology changing the traditional audit?
Mahoney: As we leap into an era of global connectivity and complexity, the role of identifying risk and increasing transparency in operations and efficiencies holds great importance to CEOs, CFOs, boards and other key stakeholders.
Technology is enabling us to rise to this challenge. We are leveraging advancements to apply cutting-edge approaches to our audits. We are harnessing the power of big data to pinpoint areas of higher risk, which in turn can lead to early identification of fraud and operational risks. We are-laser focused on asking better questions, and using every tool in our arsenal to deliver deeper insights and better answers than ever before.
From identifying new customer segments for a client in Africa, to risk-profiling revenue that led the management team of a retail business to consider the redesign of key processes, to the identification of a flawed process that led to unsupported cash balances for an automotive client, I have seen firsthand how important discoveries are empowering leadership.
We are doing this more consistently across an increasingly complex landscape, completely changing the nature of our work and amplifying its impact on companies and economies alike.
Vertucci: One of technology’s greatest impacts on the audit world is our ability to perform remote audits. We can do an audit from anywhere in the world and it’s all paperless. This, combined with software that allows for large amounts of data to be uploaded to an auditor’s server (e.g., ShareFile), has been the perfect marriage. We have seen a true revolution in terms of how audits are completed thanks to systems like ShareFile and FTP sites. It’s easier than ever to share large amounts of information from anywhere in the world.
Technology changes have also led to better support for quality-control standards in that there is an imprint when auditors log in to their software to review workpapers, when they sign off, finalize, etc. It’s also easier to comply with quality control standards in terms of document retention and certain technologies enable easier review of large amounts of data. I’m referring to more advanced search functions now available to us through technology.
Furthermore, technology has allowed the individual auditor to be able to take on more audits. The spreadsheet is one of the most profound inventions for auditing and allowed us to say good-bye to the days of the pencil and green bar paper. The advent of the spreadsheet enabled auditors to take on more audit work. It created economies of scale that didn’t exist previously and allows for small firms to compete with large ones.
Among the many benefits of the remote audit are enhanced efficiency, less travel to the client site and less expense to the client.
Fornelli: Firms are expanding their data capabilities, hiring data scientists and technologists who are experts in data collection and tagging. Data analytics, natural language processing, and artificial intelligence are no longer science fiction for auditors — they are being incorporated into the audit process. Use of these techniques can help identify fraud or other risks.
Coffey: Technology is a tremendous enabler to the audit. The ability to more efficiently and effectively access and analyze structured and unstructured data can translate to a higher-quality audit and better insights into the business for the auditor and the client alike.
It’s worth noting that technology is an important driver of the AICPA’s Enhancing Audit Quality initiative for the profession. EAQ is a comprehensive effort to look at all the factors that go into an audit, from education to training, from standards to enforcement, and integrate enhancements that lead to improved performance.
Gramlich: Technology is beginning to have a big impact on the traditional audit process. While the Big Four and some of the larger firms have been building/refining their internal tools for several years, technology is now becoming available for the midsized audit and beyond. These new “tools” all center around the data — extraction, manipulation, reporting and analyzing. This gives the auditor substantially more control and insight into what is actually going on within a company and will allow them to provide meaningful value-added services in a more timely fashion.
Miller: Consider inventory reserves: It is now possible to identify patterns between purchases activity and sales activity at the individual inventory item number when evaluating inventory obsolescence estimates. Firms are increasingly embracing and developing analytical tools that create data visualizations that enhance the understanding of our clients’ business processes to more dynamically explore and focus our efforts on patterns, trends and outliers. In other words, a good audit is one that responds to the data sets. The current tools and applications allow flexibility in developing customized solutions that can easily be applied across particular industries, components or data sets. There is also the added potential benefit of complementing conversations with those charged with oversight with succinct visualizations highlighting specific business issues and risks. Graphs, charts and tables and other forms of visualization more effectively identify potential problem areas.
As it relates to audit techniques, traditional audit analytical procedures provide many benefits to the efficiency and effectiveness of an audit and have been part of the audit toolbox for many years. However, traditional techniques can be limited by being too prescriptive and unfocused, reducing insights delivered to auditors and their clients. Modern technology-enabled data analytics can improve the risk assessment process, the depth of substantive procedures, and the focus of tests of controls.
What other factors, if any, are influencing the future of the audit function?
Vertucci: The regulatory environment is a tremendous influence on what will happen with audits. Bodies like the PCAOB, the AICPA and the Securities and Exchange Commission will continue to have a great impact on our profession. Technology will continue to evolve to keep up with the changing times. I wouldn’t be surprised if we see technological advancements come out that improve the communication process between an auditor and company engaged in a remote audit. Communication is an area ready for technology enhancements and creation. Tools such as open items list between the auditor and the company are in need of better solutions in the remote audit environment.
Coffey: Access to greater populations of data and more powerful tools and approaches to make sense of that data. This means both big data and little data (it’s not just about big data, it’s also about being able to analyze large data sets, including traditional information such as general and sub-ledger accounts and transactional data, in a more comprehensive way). And more powerful tools doesn’t necessarily mean super-sophisticated or expensive tools (much can be done with Microsoft Excel, for example).
Fornelli: Factors related to human resources and talent will continue to influence the profession profoundly. Generally speaking, the accounting and auditing sector has a very favorable career profile, with a healthy hiring outlook driven by a global increase in demand. The auditing profession’s technological evolution should be of particular interest to jobseekers, as audit firms of all sizes 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.
A significant factor is the ever-evolving workplace. Auditing firms have established themselves as leaders when it comes to work-life needs, family friendliness, 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 nontraditional career models and ways to provide employees freedom to move among career paths within the firm and the profession.
Miller: As it relates to the practical business of audit, accounting and auditing talent demand the same things of their employers as those in other professional services professions: workplace flexibility, the opportunity to learn and be recognized, and culture that recognizes and rewards achievement. Creative use of technology promotes and allows us to measure each of these.
Mahoney: Companies are continuing to look to M&A, partnerships and alliances to fuel growth and protect market share. They are doing deals across borders and across sectors to defend against the constant threat of disruption while driving innovation.
Given the diversity and complexity of today’s businesses, audit professionals must be able to look across borders, sectors and industries to unearth risk as well as critical insights. They must be trained to apply a global mindset to local landscapes and to think beyond the horizon with a forward-looking perspective.
Auditors also need to be able to collaborate with global teams. This year, we launched EY Canvas, an audit performance documentation tool. Among other things, it enables primary teams in group audits to collaborate and execute efficiently while addressing issues that may arise throughout the process.
Gramlich: The cloud as a platform and more specific and sophisticated technologies in the area of data analytics are going to be a huge benefit for the auditor. Having data centralized and provided in a consistent format across all of their clients will allow the auditor to use analytical tools in much more efficient and creative ways. Certainly the AICPA’s Assurance Services Executive Committee and their work around data analytics and data standardization will play a key role in this as they work towards creating a new AICPA Audit Data Analytics Guide.
How will the audits of the future differ from current ones?
Miller: There is no doubt that increased use of technology-assisted audit techniques will continue to result in increased audit quality. As audits become increasingly automated, there will be less emphasis on ticking and tying and vouching, and greater emphasis on understanding the overall picture painted by the data, better understanding inputs and assumptions, and identifying and evaluating trends, patterns, and outliers. In other words, technology will reduce some of the more routine aspects of an audit, and allow the auditors to spend more time and energy and focus on the more critical judgments and processes.
Gramlich: With the client’s data available to the auditor in a standardized format and easy for the auditor to access in a timely manner, we will see more audits move away from the traditional heavy year-end workload to more of a “continuous auditing and monitoring” approach. This approach should have big benefits for the auditors, their clients and third parties that rely on these audited financial statements in that the auditor will be able to get closer to the transactions at the time they are happening and provide advice accordingly.
Coffey: Through the application of automation and analytics, the audit of the future can be more timely; for example, using continuous assurance techniques and continuous control monitoring to detect outliers and risks in real or near-real time, and more insightfully.
It is also likely that the subject matter of audits will change over time, not only in terms of the information analyzed by a financial statement auditor, which might expand to larger populations of data versus traditional sampling, but also in terms of the breadth and type of information that is considered.
There is increasing demand for CPA assurance over other very relevant and business-useful types of subject matter beyond traditional financial statements, and the profession continues to develop attestation guidance for services that provide this trusted third-party assurance — for example, cybersecurity and sustainability reporting. This information, which is used in many respects to drive business decisions, is a prime area for assurance. As we develop assurance guidance for new subject matter areas, such as the guidance we are currently developing for sustainability reporting and for cybersecurity, we are pioneering new ways of providing meaningful assurance on the broader corporate information set.
Fornelli: Audits will evolve in terms of transparency. Across the globe, investors, audit committees, and other key market participants have expressed their desire for more information regarding the work and views of public company auditors. The auditing profession is responding actively to this desire on a number of fronts, notably development of audit quality indicators and rethinking the auditor’s report.
On the latter issue, the United Kingdom has been in the vanguard. U.K. audit reports now provide more information, including a discussion of the application of materiality, the scope of the audit, and an assessment of risks of material misstatement. According to a report issued by the U.K.’s Financial Reporting Council in January 2016, “Investors have welcomed extended auditor reporting, and greatly value the enhanced information it provides.” Meanwhile, regulators at the U.S. Public Company Accounting Oversight Board are considering a proposal to enhance the existing auditor’s report by providing additional information, such as the communication of critical audit matters arising from the audit.
Vertucci: I believe we will see audits become more paperless and firms will rely more on technology to do an audit whether performed remotely or onsite. With so many touch screen applications in our everyday lives, it is inevitable that similar technology will find its way into the audit function. Auditors will be forced to keep up with technological changes because companies are utilizing more technology for their record-keeping and accounting and in more advanced ways.
What should auditors do to prepare?
Coffey: Auditors should be prepared to take advantage of the changing environment by seeking training opportunities in new subject areas and on new audit techniques. Many firms are also hiring talent that have a broad range of skillsets, including technology, data science, and analytics. Focusing on quality and adherence to our profession’s professional standards and guidance are paramount.
Fornelli: For public company auditors, one critical part of preparing for the future is to maintain and enhance the profession’s continuous engagement with other stakeholders in the financial reporting process. This engagement allows the profession to stay responsive to stakeholder needs that will continue to evolve in a dynamic marketplace.
Miller: There are certain skills that are necessary to appropriately assess what data to target and interrogate, what types of information within data sets are important, and what represents an outlier versus an exception. This is the ultimate marriage of knowing the client business and embracing the emerging technology. That’s the value proposition. And firms are dedicating more and more training and development efforts of staff and partners to help enhance and refine these skill sets. Current tools are becoming increasingly user-friendly and the toolbox is evolving. This will continue both as technology continues to advance and as the professional literature matures to keep pace with the audit risks that today’s (and tomorrow’s) environments introduce.
Mahoney: Looking ahead, companies need to make significant investments in human capital. Recruiting a robust and diverse talent pool that will bring constructive skepticism, insight and foresight to the audit process is critical.
Auditors also need to understand how access to these new approaches can improve audit quality. We have heard time and again from clients that we are homing in on the right areas of risk, helping to improve financial reporting and internal controls.
When we combine best-in-class training, technological sophistication, audit expertise, and depth of sector and issue expertise, we can fully harness our capabilities. It will result in auditors who can apply their observations to broader market trends, driving the continual evolution of our profession.
Gramlich: Take full advantage of what is available to you now. This is an area of your practice where you can implement change on a very measured and controlled pace — a few clients at a time, one or two teams at a time, or just one office. Consider hiring (either full-time or contract) a professional project manager to help implement this change in process by having them involved up front in the planning, help create the metrics by which you will manage success (key performance indicators), and create a consistent feedback loop to key members of the firm.
There are many steps of the audit process that are starting to get automated, such as streamlining how the data is accumulated from the client and automatically creating the audit working papers. Every firm should be aware of what is available, what the AICPA is doing to help, and take a deeper look into how these existing tools can help take their audit practice to another level of delivering a higher-quality audit and increased client satisfaction.
Fornelli: Another key to preparing for the future is for the auditing profession to stay true to its long and distinguished past. Auditing is built on attestation services that, at their core, involve an independent and objective evaluation of controls and information that are the responsibility of another party. Over a history that stretches back to the early 1800s, the profession has developed a robust approach for offering such valuable business services. Whether inside or outside the mandated audit of financial statements, audit firms must operate within a comprehensive framework of standards that demand independence, objectivity, and skepticism.
The auditor of the future can use these fundamentals as a strong foundation on which to build innovative approaches. The profession will need to maintain and develop these fundamentals, particularly as it expands into promising new areas like offering attestation services for sustainability, cybersecurity, or any other areas the marketplace desires.
Vertucci: The most important thing we can do to prepare for the future of audit is to have an open mind. Change is imminent and constant, especially when it comes to the use of technology. I believe we will see future generations be more open and comfortable to change, especially because they are born into a digital world.