Evolv­ing the au­dit: Look­ing ahead in a time of rapid change

Accounting Today - - Assurance - By Su­san S. Cof­fey

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.

Tech­nol­ogy

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.

Method­ol­ogy

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.

Stan­dards

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.

New skills

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.

AT

Su­san S. Cof­fey, CPA, CGMA, is ex­ec­u­tive vice pres­i­dent of pub­lic prac­tice for the Amer­i­can In­sti­tute of CPAS.

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