Rethinking the future of audit
The relevance of audit may shrink unless auditors learn to look ahead, instead of in the rear-view mirror, warns US audit guru Alan Anderson.
- Anderson is a special guest speaker at CAANZ’s Audit Conference 2018.
- Auditors must look beyond checklists and communicate with staff in the client business.
- Auditors must exploit the power of technology to free up time for greater value work.
By Chris Sheedy.
When Alan Anderson conducted an inventory audit several years ago, he realised the job he was doing simply required him to count boxes. There was no need to speak with any staff or to develop an understanding of how various products and materials move through the production process. There was no need to understand anything deeper about how the business worked.
Then he saw a staff member on the shop floor who was operating a punch-press machine and decided to have a chat. The worker said he was making scrap but the parts were not really needed – his boss would not receive his bonus if he did not keep staff busy.
Anderson dug deeper. By looking at the production manager’s compensation program, he discovered that the manager received a bonus based on direct labour employed.
“So I found two big nuggets of great information,” he says. “First, I now knew that the compensation program that was entirely well-meaning when it was developed actually incentivised bad behaviour. Secondly, I also now recognised a serious inventory obsolescence problem.”
Suddenly Anderson was much more than an auditor. To the client business, he was a valued advisor, a consultant who was able to offer expert insight that would directly benefit the business’s bottom line.
Reaching beyond the numbers
These days, Anderson is president of his own specialist audit and assurance consultancy, Accountability Plus LLC. He’ll be a special guest speaker at CAANZ’s Audit Conference 2018. And he believes auditors’ roles as advisors have never been more important.
In today’s accounting and technology environment, there has been plenty of talk about audit devolving from an art form carried out by skilled professionals into a commodity performed by robots and powered by artificial intelligence. These discussions rely on an assumption that audit will remain as it always has been, a strict and unchanging service that is only about historical numbers and compliance.
“The concept of the future of audit is shaped around getting our heads above the screen and looking around.”
While there is broad acceptance that automation will play some role in changing the way audit is carried out, a strong line of thought also says this is an exciting time to be involved in audit.
However, Anderson believes a lot has to change before the bright future of audit can become reality.
“What we really need to do is step up our game to become more relevant,” Anderson says. “Rather than just going through the motions, we have to take the time to truly understand what's going on, to learn how the business works and what it needs. It can’t just be about making sure the numbers are right.”
Helping clients read their figures
Anderson argues the role of auditor must evolve into one where the auditor helps the clients to better interpret their own figures, just as he did when he discovered that worker who was ordered to produce scrap.
“Historically we have done an exceptional job at compliance, but we haven’t done a good job at talking to our clients about what the numbers mean,” Anderson says.
Success has to do with stepping outside the strict confines of a client’s finance department, because there is immensely valuable business intelligence to be picked up across an organisation. Sometimes it’s just about giving yourself the permission to look.
The end of pass/fail
Anderson’s thoughts reflect current ideas in the broader audit world. In a speech at an ACCA audit conference in Brussels in late 2016, IAASB (International Auditing and Assurance Standards Board) chairman Arnold Schilder defined the challenges and opportunities in the future of audit as four-fold.
The first of these ideas and opportunities lies in understanding the business of the auditee. If value preservation is a cornerstone of a robust audit, Schilder told his audience, surely an auditor has to understand what is valuable to the client business in the first place, and what threatens value. Second is the preservation of professional scepticism, a specific state of mind and attitude essential to a thorough audit.
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His third point is that audit must adapt to the digital age in order to avoid disruption and to empower its own work practices. The fourth topic, connected to the third, is around innovation in auditor reporting.
“For many decades, external users of financial statements and the attached independent auditor’s report received only one sentence from the auditor, the audit opinion – a binary pass or fail,” Schilder said. “That is now changing completely.”
How is it changing? Schilder argues auditors should provide numerous valuable observations on key matters in the audit, insights that are most relevant to users, and in a very readable fashion. “We know from surveys in early adoption countries, notably the United Kingdom, how much this is valued by these users,” he says. “There are even investor awards for the most innovative and most insightful auditors’ reports. This new, more informative and relevant reporting by the auditor helps clarify the public’s perception of what an audit is. It also stimulates professional dialogues between the company, its investors, auditors and regulators.”
Anderson believes artificial intelligence may well help point to out anomalies and flag up specific considerations. But like Schilder, he thinks humans will need to intervene to interpret such information in the complex environment in which fast-changing businesses compete.
Artificial intelligence, after all, simply analyses thousands of pieces of data that it has been fed. The most important piece of information may be something that is just about to happen, or a challenge to the business from a previously unseen angle.
As much as the industry complains about audit becoming a commodity, organisations actually want to appreciate the power of audit, Anderson believes.
Grasping the opportunity
But he says the audit profession needs to grasp its opportunity to create value. “The minute there was pressure on us for time and fees, we immediately put pressure on staff to figure out how to cut time,” he says. “What we cut time on was the time it took to really understand what's going on in the client business. We got all these forms to fill out and endless checklists. By the time we’re done with them, we no longer have time to look at the business itself.”
“What was net income on your last audit?” Anderson often asks auditors during his travels. They rarely know the answer. But every one of them knows the number of pages in their disclosure checklist.
“The concept of the future of audit is shaped around getting our heads above the screen and looking around,” he says. “We really need to see what is going on in and around the client business. We have to become very good at asking questions, rather than simply going through checklists, because the artificial intelligence isn’t going to ask any questions. The audit of the future requires a huge change in skill set.”
Is the audit role more significant in an environment in which many members of the public have lost their trust in corporations? Do the constant media tales of tax avoidance, greed, of overstepping ethical boundaries mean auditors should, in fact, become more important than they ever were? Anderson thinks not.
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The role of an auditor has always been vital, he says. And auditors have always done the very best job they can in the circumstances. The real issue is that the circumstances have changed, not the auditors or their roles. Pressure to cut time spent on a job has increased.
“That’s what’s so great about the technology that’s coming into our industry,” he says. “The stuff that takes up time goes away. Instead, we have an environment in which the practitioner can now spend more time interpreting data and understanding what's going on, and making sure that what they see is relevant. This is what determines whether the numbers they report are useful to the business.”
Embracing the future
Anderson believes that at the highest level, the future of audit is about quality. It has to be relevant and take into account the business of the client. It must constantly change through innovation and it absolutely should empower its people to see beyond the checklist, to truly understand the client.
“What gives you the right to lift your prices three to five per cent each year if you’re not being innovative and doing things better?” he asks.
“Get your people out there and teach them to ask questions. Old-style auditing has been about looking into the past, being a historian with numbers and looking in a rear-view mirror. But we’re moving into the future, and what good is a rear-view mirror in a driverless car? The future of audit requires a change in mindset and culture, and that’s going to mean we need to give ourselves the gift of time.”
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Chris Sheedy is a freelance professional writer based in Canberra.