Evolving the audit: Looking ahead in a time of rapid change
When we think of changes to the financial statement audit, we tend to think in big, broad strokes. The period right after the stock market crash of 1929, for example, ushered in the modern era of independent audit of financial statements, a key to public confidence in our global markets.
The audit has been steadily evolving since then, adapting to the computer age and, in recent years, the rise of data analytics — and CPAS have played and will continue to play a pivotal role in that process. Automation and the digitization of business information are now reshaping the finance function, altering the way we, our clients and our employers approach our work.
The pace of this change is unprecedented: Mckinsey Global Institute estimates that 49 percent of work activities could be automated right now using current technology. Big Four firm Deloitte, meanwhile, projects robotics could automate 40 percent of basic accounting work by 2020. For some, it’s not a big leap to envision an audit of the future that’s wholly automated, untouched and unsupervised by human hands.
I don’t subscribe to that view. Technological advancements give us tools to continue to improve the efficiency and effectiveness of audits in an increasingly complex business environment, but there is still a need for the professional evaluation, judgment and skepticism that auditors bring to the task.
The interplay between human and artificial intelligence is a key focus of “Evolving Auditing in the Future,” one of the strategic priorities of the Association of International Certified Professional Accountants, the global organization that represents the unified voice of the American Institute of CPAS and the Chartered Institute of Management Accountants. Beyond changes to the financial statement audit, I foresee broad, tech-driven opportunities to evolve assurance in several areas — such as data integrity and cybersecurity risk management — that will strengthen trust and confidence in our global markets.
The changes to the financial statement audit will be shaped by four factors: technology, methodology, standards and skills.
In our connected world, historical reporting is less relevant than real-time reporting. With the onset of the cloud, automation and data analytics, we are already moving down the path toward greater timeliness in financial reporting. The final stage — continuous monitoring and assurance — will benefit the public but require innovation to succeed.
Automation and the digitization of business information are now reshaping the finance function, altering the way we, our clients and our employers approach our work.
One promising technology is blockchain, a digital, distributed ledger that records transactions over a peer-to-peer network. Many questions remain, however, about how blockchain will work in practice, from scalability to access to the underlying data for auditors to the tax, accounting and auditing treatment of crypto assets. The AICPA and its technology arm, Cpa.com, are collaborating with the Wall Street Blockchain Alliance, a leading trade organization of financial market professionals, to examine many of these issues and determine how they can be addressed from an accounting, auditing and tax perspective.
Artificial intelligence is another technology that we are researching, first to better understand how to address the lack of transparency around complex algorithms when using artificial intelligence and, more specifically, machine learning in the context of the audit. We are also considering the practical application of AI to build on the ability of data analytics to support the exploration of information examined as part of the financial statement audit. To that end, the AICPA and Cpa.com have been working with Caseware International, a leading audit software company, to create an integrated audit solution for CPA firms of all sizes to deploy technology-enhanced auditing processes.
The increasing use of audit data analytics can transform financial statement audits and will be a key element of the transformative, data-driven audit methodology that will underpin a new, dynamic audit solution. Analyzing both structured and unstructured data, and where practical analyzing entire populations of data as opposed to sampling, will help provide greater audit insights. We’re also working with leading CPA firms, Rutgers University and other researchers on the Rutgers AICPA Data Analytics Research Initiative, or RADAR, which is focused in part on the development of techniques to identify outliers in large pools of data that may be more likely to contain material misstatements, and we expect more refinements in these kinds of approaches going forward.
The Auditing Standards Board has recently prioritized certain standard-setting projects, with an eye toward technology and evolving practice, starting with the standard on audit evidence. Following on this work, the ASB will address auditing estimates, risk assessment, data analytics, quality control and professional skepticism. Without changes to the standards, innovative audit methodologies will be difficult to develop and execute.
As practice continues to evolve, auditors will increasingly need to draw on a broader range of skill sets, from information technology to data science to analytics. The demand for new assurance service lines, such as SOC for cybersecurity, will require expanded competencies. Firms will increasingly seek talent who are digitally proficient and open to new assurance approaches, while still maintaining a laser focus on trust and quality. It’s up to the profession to work with academia to provide the right learning curricula to meet these new, rapidly shifting skill sets.
Technology is a driving force behind the audit of the future, but we need to make progress on methodology, standards and skill development if we’re going to realize its potential. It’s an exciting time for the profession, one that requires urgency, focus and care.
Susan S. Coffey, CPA, CGMA, is executive vice president of public practice for the American Institute of CPAS.