Monday, February 04,2019/02:55pm/Deloitte

My early days in the profession witnessedgoing to the field with loads of prior year audit files stacked in severalvolumes sometimes up to ten volumes depending on the size and complexity of theengagement. As a year one Audit Associate then, one of my tasks on anyengagement was to obtain and move to the field long and short analysisspreadsheets with which we are to document audit work to be performed plus theprior year audit files. Today, audit professionals go to a client with theirlaptop, equipped with audit software to deliver seamless quality audit serviceto clients.

However, current technology being used by auditpractitioners has its limitations and no longer meets the ever growing needs ofpractitioners today’s complex global economy. Since modern-day auditprofessionals have been exposed to how applying cutting edge technology can bea key differentiator with clients and talents.  Also as the industry movesforward, organisations will require carefully crafted business strategies thatanticipate the ultimate effects of regulatory reform, technology changes,competitive dynamics and market movements, hence audit firms must continue thetradition of excellence and innovation in audit technology by embarking oninitiatives and invest in new technology and skills to shape the future, remaincompetitive and remain relevant in the future.

There is wide debate around the impact that advances intechnology in this disruptive era will have on the scope and relevance of theaudit of the future. If we do not engage with these developments the outlookcould be bleak: at best the profession as we know it will become less relevantand at worst we might not remain in business at all. But if we harness theopportunities that technology disruption offers us then we have a very excitingand integral role to play.

Over the past 10 to 20 years there has already been asignificant change in how we all use technology – both in business andsocially. However, the rate of technology change that is around the corner islikely to be significantly greater than any we have experienced to date. As anexample, market research company Forrester reported that by 2021 robots willhave eliminated 6% of all jobs in the United States – just a few years away.

And set against this backdrop we have a professionsteeped in tradition and operating within rigid regulatory frameworks. Do thesedisruptive technologies present an opportunity or a threat to the auditingprofession?

While this pace of change will be perceived as asignificant threat by many in the profession, this is a time of greatopportunity for the profession if we embrace it. The biggest risk for auditorslies in doing nothing in response.

Some routine roles/tasks will undoubtedly be eliminated.However, there will always be a need for skilled, human auditors who can applysound judgment and arguably this is even more important in an increasinglytechnology-enabled world. After all, who will decide what information should befed into technology-enabled tools? Who will interpret and communicate theresults? And who will ensure that end users can rely on the output from thesetools and have a robust understanding as to how risks such as cyber threatshave been mitigated?

The current technology landscape

Technology is already changing the face of the auditprofession. Machines are helping us today to do audits faster, efficiently andwith a reduced risk of error.

Analytics

Analytics has been a buzzword within the audit landscapefor a number of years now and it remains a pivotal part of the move towards theaudit of the future. Improvements in analytics capabilities are enablingauditors to concentrate their efforts towards outliers in a population andallow 24/7 analysis of huge data sets. Suddenly testing complete data setsrather than a sample-based approach is achievable and the concept of continuousaudit within reach, allowing auditors to test audit evidence in real time, withtimely identification of issues and insights and allowing focus on anomalies ina population.

Audit Analytics has an important role in raising theaudit quality bar, in particular, enabling stratification of data and focusedtesting of large or complex data sets. As with many of the technology solutionswhich are going to become part of the auditor’s future toolkit there is acritical dependency on the standardisation of data as a pre-requisite to beingable to overlay these advanced tools.

Going forward, there is a shift towards predictiveanalytics – using analytics capabilities to predict events, explain when andwhy they might occur using simulation and modelling and also prescribe the mosteffective path to maximise opportunities. Such developments will allow auditsto be increasingly precise in targeting risk and increase their relevance.

Artificial Intelligence (AI)

AI is simply the task of getting computers and machinesto do tasks that require intelligence when done by humans. Most current AI isnarrow in that it is created to deliver a specific task within certainprogrammed parameters. This means the AI is reliant on humans providing initialinstructions and algorithms.

Cognitive computing uses artificial intelligence andmachine learning algorithms to go beyond analytic capabilities and to learn andmake autonomous decisions. AI is considered a fundamental advance in drivingefficiency and quality of output. 

The concept of AI is not new and is being activelyexplored and rolled out in a broad range of areas – from the healthcare sectorto the automotive industry, from online advertising to credit agencies.Unsurprisingly, the audit profession is also exploring the opportunities andpotential for harnessing AI within an audit approach.

Emerging technologies like AI present the auditprofession with many opportunities to improve the way we work, to providebetter services delivered in a more efficient way and bring enhanced insightinto the audit process.

Just take one example of natural language processing:using advanced machine learning techniques, auditors are now able to quicklyprocess, highlight, and extract key information from electronic documents.These cognitive capabilities enable the auditor to assess a far broaderpopulation set in its entirety and focus effort on key items of interest andinsight while the repetitive or low judgement area of extraction is automated.

Although automation, analytics and cognitive technologiesin themselves have the power to disrupt how audits are delivered – and indeedthe business models and structure of audit firms – the real transformation of theaudit profession will occur as these exponentials converge and combine with newtechnological disruptors, such as distributed ledgers – often referred to asthe blockchain.

Technology horizon scanning

Blockchain

Distributed ledgers are becoming an increasingly hottopic. The concept of a secure, distributed ledger of information whichprovides a platform for representing and exchanging things of value coulddisrupt the way in which transactions are conducted and recorded in the future.Many organisations are starting to recognise the potential of blockchaintechnology and some are investing heavily in experimenting in this area.

Over the last five years, blockchain has evolved from acryptocurrency or payment system to a broad ecosystem of digital automationopportunities.

The blockchain provides an immutable record of atransaction established in code. Some have suggested the future possibility oftriple entry accounting where every accounting transaction recorded by anentity also has a corresponding posting onto a public blockchain. All thetransactions on a public distributed ledger are available to all the users inthe network, making the system transparent by design. 

In reality, this feels a little far off and is dependenton collaboration within a complex ecosystem of companies, regulators, standardsetters and government. The more likely route over the short to medium term isthat some core building blocks of the blockchain concept will be incorporatedinto the way in which private groups of companies transact.

One such example is the way in which blockchain can beused to record smart contracts between entities. Such contracts coulddramatically disrupt the way people do business. It is easy to see theadvantages of users being able to interact with smart contracts to invoke anautomatic execution of defined rules and as a way of securely holding andtransferring legal title of the asset. Details of how to account for thecontract could also be included within the smart contract. This would enforcecongruence between the recognition of costs in one entity and the recognitionof revenue in the other. Such transactions are self-verifying meaning thatsomeone auditing the recognition of revenue from the contract would know thatthe other party to the contract has agreed the costs incurred, eitherthemselves or through a trusted source of verification.

And what is the long term view? Put the concepts of smartcontracts and triple entry accounting together and the world of auditing looksvery different. With all transactions verified by an independent source (or theother party to the smart contract) and a complete history of all transactionson the blockchain, the focus can move from the audit of transactions in a yearto auditing the terms of the smart contract itself.

Rather than waiting until year-end to see the impact ofan entity’s transactions on their financial statements, auditing could occur assmart contracts are created, before the transactions even take place.Misstatements, either due to fraud or error could be stopped before they occur.Auditing becomes real time – not an annual event looking back at the past year,hence bringing a new lens to transparency and corporate reporting.

Most development efforts using distributed ledgers remainhighly experimental, and practical applications and large-scale commercialsolutions have yet to emerge. And of course it is not without its negativepress; the instability of Bitcoin is a seasoned discussion point. Morerecently, the negative press associated with the “hacking” of ledgers due topotential flaws in the code has made people realise that the blockchain may notbe as impenetrable as thought.

Blockchain is still a relatively early stage technology.However, despite the very obvious current challenges and its unpredictablejourney to maturity, the disruptive potential of distributed ledgers remainssignificant.

What does this all mean for the profession?

As a profession that is steeped in tradition andsurrounded by frameworks and concern for regulatory challenge it is going totake a concerted effort to embrace and proactively respond to the opportunitiesand challenges that the digital and technological revolution will bring. Someof the biggest hurdles will be around responding in an agile way and having aforward-looking mindset.

Technology disruption is not a distant future state – itis here and now. If the profession is going to remain relevant it needs toembrace these changes. And the pace of change remains one of the biggestthreats to the profession. If we are not proactive in our response to thesetechnological advancements then the traditional audit services and audit firmsare wide open to challenge from the more agile startup community.

The response required is complex and requiresinteractions from multiple stakeholders. Each of these stakeholders is criticalin ensuring the ability of the profession to move forward.

Auditors

While there are many important stakeholders, indiscussing the future of the audit profession it is auditors themselves whoshould be seeking to drive the agenda. There is a responsibility on auditfirms, particularly the largest firms, to continue to invest in developingincreasingly technologically enabled audits. This needs to involve someexperimentation and an active ongoing dialogue with regulators as newtechniques emerge.

The increasing use of technology will result in newchallenges for businesses and new risks in the audit process. Auditors willneed to validate the design and controls around the platforms which host thenew software in addition to interpreting the complex data sets thatarise. 

All firms – regardless of size – have the potential to bedisrupted by technological advancement. While smaller and medium practices maynot be able to invest in experimentation on a scale that larger practices areable to, building awareness and engaging in the debate, as well as developingan agile strategy, is key to successfully adapting to these new challenges andopportunities. 

Regulators and standard setters

Recent and future technological advancements demand arethink of the regulatory environment. In the short term, as auditorsincreasingly use algorithms to identify outliers for testing there is an urgentneed for regulators to reassess the relevance of the regulatory environment andadapt their focus. This means that regulators need to work closely with auditfirms to understand the experiments in progress and to make some wholesalechanges to regulatory requirements which in turn will shape individual firmmethodology and approaches.

Longer term disruptors – such as distributed ledgers –will require a completely new regulatory environment and accounting standardsto ensure consistency of approach around verification of ledgers, validationand recording of transactions and the role that oracles play verses auditors.

If we want something that is going to supporttechnological developments and be a meaningful and appropriate regulatoryenvironment, we must ensure that we do not simply try and shoehorn the newtechnology/approach into an existing framework. There needs to be a transparentprocess and mechanism for developing these new frameworks with input from allkey stakeholders. 

The audit profession can be a big ship to turn and aconcerted and proactive effort is needed on the part of regulators, standardsetters and audit firms to make this change happen. There is a risk thatexisting laws and regulations will act as a barrier to the pace of change andtherefore action is needed now to start the cogs of change.

Companies

Technological change and its impact on internal andexternal audits will also bring challenge and opportunity for companies. Forexample, boards and audit committees can demonstrate an interest in howtechnology-enabled their external audit is through supporting technologyinvestment in internal audit. 

From a governance perspective, boards and auditcommittees will need to be appropriately resourced and sufficiently trained inorder to understand the impact of technology on companies’ own financialreporting processes, as well as being able to understand and challenge the workexecuted by auditors. 

And, from a practical standpoint, if companies want tobenefit from a more effective and efficient audit, they will need to be open tomoving towards a more standardised format of financial data to enable analyticscapability and cognitive software to be used without the prohibitive barriersof complex data manipulation which is often the case at present.

Investors

The investor community also has an important role toplay. The clearer this community can be on what information they need, when itis needed and what level of assurance is required, the greater the chance ofsuccess. 

Investor needs can be met through more innovative, timelyand relevant financial reporting, enabled by the types of technologicaldevelopments highlighted above, but engagement and clarity of needs is key.

What does this mean for the auditor of the future? 

Significant change is coming and offers a hugeopportunity for the profession to be more relevant and trusted than ever. Thisprize will require us to embrace change and to train and to develop people witha different range of skills and abilities. 

While the broad business training that qualification forthe ACA provides is still considered a valuable asset by graduates, there is arisk that the profession is still perceived by the majority to be very narrowin its graduate selection and required skillset. 

For the future, the mix of skillsets is critical. Theprofession will need people who have accounting skills but who are alsoextremely IT literate. Analytical capability is coming to the fore – and alsothe ability to code and work with a range of new technologies. To meet thisopportunity there are already some examples of audit firms recruiting in abroader way than they have done in the past and this trend looks set tocontinue.

Added to this is the potential to use the crowd todeliver audit tasks – a future that will be enabled by technology platforms andwhich will bring a whole new dimension to the flexible and agile auditworkforce. 

Future audits will be of a higher quality enabled bytechnology, but this is only part of the equation. Highly skilled humans willalways be needed to interpret the big data, report and to interact with otherhumans on key judgement areas and provide assurance around the new technologieswhich are generating the data.

Technology is not a silver bullet – it is only as good asthe data underneath. While the day-to-day responsibility of the auditor maychange, the opportunities for our profession are greater than ever.

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