Audit as we know it, will change
13 MINS READ
Highlights
- The current business environment is dynamic, and stakeholders, now more than ever, need the assurance that auditors provide.
- Audit, being a regulated industry, offers audit firms and their clients time to actively participate in the discussion and craft an appropriate response.
- Trends in the industry will change the audit teams’ composition and bring skills that were previously not required.
In this article
Introduction
The world of business changes fast and stakeholders need the assurance that auditors provide.
Business is an ever-changing beast. And advances in technology only amp up the dynamicity. With old ways of working giving way to new business models, the next disruption may happen sooner than you expect. While disruptions in business are almost always an opportunity in disguise, they do bring along a fair share of discomfort and unease, to begin with. After all, who doesn’t love the status quo – but that is exactly what restricts growth.
Having recognized the importance of disruptions in business, we must also acknowledge that navigating a change successfully requires a company to exude confidence and assure its customers, partners, and investors that all is well and will continue to be so. And who better to do this than the auditor? We discuss what auditors need to do to adapt their function for the changing business environment so that they can deliver on the promise they make – of certainty and assurance.
Charting the future of audit
Audit has a solid future, and that is a relief.
Audit, as a service, has received some harsh criticism in recent years. Several high-profile accounting scandals have put it under the microscope. The market is abuzz with cases where billions of dollars in shareholder value have been wiped off, and the regulators have had to step in to stop the slide. Like a seasoned boxer weathering a storm of blows from the opponent before hitting back, audit needs to learn from recent failings and become stronger. We believe the audit function to evolve along three key aspects.
1. Quality will remain a top priority for audit firms and regulators worldwide
The industry is being buffeted by regulatory headwinds, complex business scenarios, and an increasing amount of data to be audited. Compliance requirements are also increasing. With the increased scrutiny of the industry, it is imperative for auditing firms to meet the quality standards for every engagement. In fact, there is a pressing need to go above and beyond the standard to ensure that the nature, timing, and extent of auditing procedures are such that the auditors can provide a ‘true and correct view’ in essence. While professional skepticism on the part of auditors is a driving force, investments in people, processes, and technology are also needed to perform high-quality audits.
2. People management will come to the fore as audit firms navigate the new regulatory landscape
The packed compliance calendar and increasing regulatory requirements are leading to tight turnaround times, often requiring associates to juggle multiple engagements and work longer hours during the busy season. This may come into conflict with people’s career goals and aspirations, which can lead to low employee morale and a higher rate of attrition, in addition to affecting the quality of work being delivered.
Audit firms will need to focus on managing these issues to ensure that their most important assets, the employees, can deliver on the expectations and reach their full potential. There is a need for solutions that can help manage the people supply chain and alleviate the work pressures.
3. Ever-changing expectations will keep auditors on their toes
With the business environment getting increasingly dynamic, stakeholders’ expectations are also changing consistently. For example, assurance or disclosures around non-financial information such as ESG are becoming a must. Similarly, while an audit essentially is a study of the past, stakeholders expect auditors to provide more forward-looking information to make informed decisions.
Data is the key ingredient to providing many such insights. The amount of diverse and complex data being generated by businesses today is increasing multifold. Therefore, a strong focus on data and advanced analytics are required to meet stakeholder expectations.
Technology rules
Technology is both a disruptor and an enabler when it comes to new-age auditing.
While the changes are already happening in some part, audit being a regulated space offers both audit firms and their clients some time to actively participate in the discussion and craft an appropriate response. The response from audit firms will be a mix of people, process, and technology measures.
Strong internal collaboration and executive-level buy-in will be required to execute these measures and mount a successful response.
1. Advanced analytics solutions and visualization tools to gain more prominence
With audit quality being a key focus area, auditors need to look beyond traditional ways and approach each audit differently. For example, the traditional approach to auditing in which data samples are selected for testing and investigation may not be enough today. There is a need for tools that can audit entire datasets and surface the insights for auditors.
Artificial intelligence and machine learning (AI-ML) powered solutions can analyze the entire set of transactions in minutes and flag anomalies. This will reduce the risk of sampling errors and provide greater assurance. Similarly, visualizing key data points can help auditors analyze and present their findings in a transparent and digestible manner which will help everyone involved in the process.
However, before advanced analytics can be made possible, auditors will need to work with clients to assess their data quality and maturity needs.
2. People supply chain management, a must for firms
People are the biggest assets for audit firms. In an age where talent is at a premium, firms need to approach this area carefully. While it is crucial to meet client expectations, meeting employee expectations is just as important.
Employees are mindful of their aspirations and expect the firm to help them achieve their career goals. Mental and physical well-being are also important factors that need to be considered.
Firms can take advantage of people supply chain consulting to create an internal function that can effectively plan for a busy season through advanced workforce planning, talent acquisition, and development initiatives.
From a technology perspective, investing in world-class human capital management (HCM) and human resource management (HRM) solutions can provide the necessary foundations for any talent initiatives. Furthermore, talent intelligence or talent marketplace solutions can help bring automation and artificial intelligence to the talent function, allowing the workforce to focus more on strategic work.
3. Embracing new-age technologies is imperative
With AI, ML, and blockchain making significant inroads into the day-to-day workings of organizations, auditors must possess a solid understanding and working knowledge of these technologies.
All these technologies aim to improve work performance. For example, automation and artificial intelligence in the financial reporting process help uncover insights and perform tasks that would have taken days earlier. From an auditor’s perspective, it is equally important to audit the working of the AI model or the automation workflow as it is to audit the actual outcome.
Similarly, blockchain, due to its very nature, is secure by design and can assure auditors that the reported transactions represent the truth. In such a case, auditors might need to audit the governance protocols of the blockchain to establish the assertion that transactions on the blockchain are as secure as advertised.
And lastly, with everything being digitized, cybersecurity also becomes an area that can benefit from the services that auditors perform. Auditors can review the access management business rules, access usage patterns, and any outliers to help firm up security protocols, especially when it comes to finance-related applications and data.
These trends will change the audit teams’ composition and bring skills that were previously not required. Auditors of the future will be more techno-functional than ever.
What lies ahead
Audit firms have a mammoth task ahead, as they prep for the future.
AI, cloud, and blockchain will play a major role in shaping the response to the future. From planning to reporting, we expect all aspects of the audit value chain to improve significantly at the hands of technology.
The audit of the future will be a mix of equal parts human ingenuity and technological interventions.
Step one: Planning
In this step, auditors work with clients to understand their industry, operations, internal controls, and processes. The information gathered at this stage helps to construct an audit plan and assemble the team.
AI solutions can assist auditors in this stage by providing ready insights about the industry and the client. AI can also learn from similar engagements undertaken in the past and suggest an audit plan and the time required to complete the audit. Lastly, with the help of a robust internal talent supply chain, AI can recommend the right team to undertake the audit based on factors such as experience, position, and availability.
Step two: Risk assessment
It is imperative to identify audit issues early to allow time for investigation and resolution.
With the deluge of information available these days, information mining and analysis tools can look at sources such as social media to provide insights to auditors that can assist them in creating a more comprehensive view of risk.
Step three: Evaluation of controls and audit testing
Auditors conduct this step based on the insights gleaned during the planning and risk assessment stages. Strong internal controls are a foundation for a secure organization, and auditors suggest improvements based on identified weaknesses.
Auditors also use sophisticated tools and methods to analyze the transactions and balances. This is one of the most important steps that inform the audit opinion.
As we move toward full population audits to improve quality, advanced analytics can scan the entire universe of financial data and flag anomalies or outliers that auditors need to investigate and resolve. AI-powered tools can also assist in comparative analysis, work paper generation, and documentation tasks.
Step four: Conclusion and reporting
As the audit approaches its conclusion, auditors collate their work and provide insights to the management.
With generative AI, auditors can create audit reports on the go. These will include insights and disclosures as required by auditing standards and financial authorities. This will reduce the time required to tailor the reports to meet an organization's geography-specific requirements. Also, with the use of advanced AI throughout the audit process, the quality will remain high, providing the stakeholders with the necessary amount of trust.
A strong technology partner will help audit firms realize their goals and meet stakeholder expectations. Therefore, it is imperative to involve technology partners while developing a next-gen audit strategy.
Crafting a next-gen audit strategy is just the beginning. To execute it and deliver on the promise, a well-oiled working between the auditing firms and their employees and technology partners is necessary.
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