Date posted: 25/09/2017 15 min read

How data will change the future of audit

The world is watching you. Accounting and audit are set to become the main ways that democratic societies protect themselves from the tyranny of big data, writes economic advisor Pippa Malmgren.

In Brief

  • Each of us leaves an audit trail where each action and transaction is logged.
  • Big data will change the nature of democracy and more digital governance is needed.
  • Accounts and auditors will become more powerful because they will define what’s auditable in a new era driven by data.

By Pippa Malmgren.

We need to know exactly what is owned and what is owed. We need certainty that things really exist, that transactions actually occurred or that fraudulence is in play. 

Auditing and accounting cement the very foundation of modern society. They ensure our institutions and best practices are truly sound. 

But the definition of what can and will be audited is about to profoundly change – it will change the nature of democracy. The fast-approaching wave of digitisation will require more digital governance. 

Far from being boring, accounting and auditing are about to become more than exciting. They will the principal means by which citizens and states define the future of democracy and society.

Now is when the community of auditors needs to decide what is auditable and what is actionable. How can we construct or preserve the democracy we want when states, firms, and everyone in society can know and influence all that we do? 

Remember that we now live in a world where the audit trail is you – 100% of all your actions, transactions and reactions are increasingly captured, logged, tracked, analysed and used to score you. Digital dollars and digitised identity are becoming the norm. 

Pictured: Pippa Malmgren, author and former economic advisor to Barack Obama.

Yes, we are entering that episode of Black Mirror called “Nosedive” on Netflix, which you must watch if you want to be culturally fluent these days.

You should see The Circle with Emma Watson and Tom Hanks too. This isn’t for your amusement. It’s for your edification, so you can decide today what you want our democracy to look like tomorrow. 

This is a rallying call to all accountants and auditors to help craft rules which will underpin our democracy in this new auto-data environment.

Your Tinder account can now be linked to your credit score and to the way you tend to hover in the candy section of the grocery store and the fact that you speed when you are driving
Pippa Malmgren Economic Advisor

In China, this is already happening. It is called “social scoring”. In short, every sensor is used to triangulate on every person, family, company and community. Your Tinder account can now be linked to your credit score and to the way you tend to hover in the candy section of the grocery store and the fact that you speed when you are driving.

Imagine if you cut a corner somewhere. You borrow your mother’s car with its disabled parking permit, so you can drop a package off. The sensors in your car, your phone, your clothes, your community cameras now all clock what you’ve done. Your credit rating automatically falls, as does your eligibility for government jobs while your mortgage rate automatically goes up.

Accountants and auditors need to read this article in Foreign Policy Magazine: ‘Chinese Citizens Want the Government to Rank Them’. The Chinese government thinks "social credit" will fix the country's lack of trust – and the public agrees.  The article describes Alibaba’s Sesame scoring system, which has 400m users. The system provides “holistic rating of character, relying on an algorithm that explicitly down-rates certain purchases, such as video games, and up-rates purchasing behaviour that suggests responsibility, such as parenting equipment.

Alibaba then encourages users to display their Sesame Credit rating on Baihe, the company’s online dating site, so that potential partners can factor it into their romantic decisions.” The article also refers to the 2014 State Council notice which outlines plans to “establish industry credit information databases” and to “accelerate the construction of credit information systems, and accelerate the interconnection and interactivity of credit information between sectors”.

Related: Let’s celebrate #AuditorProud

International #AuditorProud Day is on 28 September and it’s an opportunity to celebrate the value of the audit profession globally.

This world is upon us, especially now that the audit trail includes your emotions and your physicality. 

The implications are extraordinary. For example, we won’t watch movies anymore. They will watch us. The endings will change depending on our emotional reactions during the film. We won’t use a phone of a laptop screen to communicate with the net any more. Instead, screens will read our emotional reactions and our thoughts and provide us with responses without our verbal input or, perhaps, in spite of it.  

Why do you think that Elon Musk has founded a firm called Neuralink? He knows that “neural lacing” will permit us to communicate with the net without any screens at all. Chips will be implanted directly in the brain and will track every thought thus merging, as he says, “biological intelligence and digital intelligence”. If that seems far away, note that a firm in Wisconsin called Three Square Market just announced they will be working with the Swedish company Biohax International to microchip their employees with 32m “long-running implantable RFID chips” so they can “buy snacks” “log in” and “open doors” more easily.They insist there will be no GPS tracking. 

And yet, I recently spoke with the CEO of a clothing company that puts RFIC chips in the seams of their clothes. He said: “I know which of my customers goes to Synagogue on Saturday and who goes to Church on Sunday and which bars they like to hang out in.” RFID chips broadcast your location.

Related: It’s never been a better time to be an auditor

Public demand for trustworthy financial information about companies and institutions is rising. Here Liz Stamford explains why she is #AuditorProud.

You may not want a chip in your brain or in your body, but you will be broadcasting anyway. Check out the NFC Ring. NFC stands for “near field communication”. It is a ring you wear on your finger that never needs charging and it can hold your bitcoin password, link you to websites, “open NFC-enabled door locks (which, apparently, exist)” and “share WiFi information, contact information or whatever you think is suitable to be passed securely to your friends, smartphones and tablets”.

But now trackers reveal far more than your location. 

Check out Project Jacquard, which launched a jacket recently with conductive threads. Your jacket and jeans are the computer interface. You dial on your thigh or coat sleeve. You cannot hide your reaction to that attractive person when it’s being recorded and transmitted by something so intimately close to you as your jeans.

With MIT’s new biometric tattoos, you are the screen. You are the track pad.

The creators write: “DuoSkin devices enable users to control their mobile devices, display information, and store information on their skin while serving as a statement of personal style. We believe that in the future, on-skin electronics will no longer be black-boxed and mystified; instead, they will converge towards the user friendliness, extensibility, and aesthetics of body decorations, forming a DuoSkin integrated to the extent that it has seemingly disappeared.”

All these technologies will also broadcast your physical and emotional reactions. Increasingly, you are the display screen. The tattoo will change colour to show your emotion. Others will broadcast their emotions on you.

Look at the IBM Watson collaboration with Marchesa. They created a dress that reflected the emotions of the crowd seeing it. Data meets couture as well as jeans. 

Your possessions own you

Even if you decide not to wear wearables like these, the “internet of things” is tracking you anyway. 

Your kettle, your fridge, your phone and your Alexa voice-activated device are all capturing and broadcasting your every movement and every conversation. Each time you shout upstairs to the kids at 5pm “macaroni and cheese” or “fish fingers” a firm that makes these is being told so that it can advertise to you better. 

It is worth thinking about the fact that Amazon handed over the data on an Alexa device in a murder trial recently. Alexa will know more about your life than you do. Even if your home is free of such devices, chances are you have a phone. It isn’t just broadcasting your conversations. It notes if the length of your gait, or pace at which you walk, changes (slowing pace and shortening gait is an indicator of heart attacks). It registers the mobile phones around you, indicating that you keep meeting one particular person in one or many locations. 

Pictured: Pippa Malmgren, author and former economic advisor to Barack Obama.

Think you can pay cash for an apartment without anyone knowing? Your phone will clock that you kept ending up within three feet of the same property agent. It will note your visits to the property and the lawyer and the accountant, who helped you with the deal.

In the new auto-data world, you won’t be able to bluff at poker or disguise your attraction to that person on the other side of the room. Everyone will know. But do they need to know? And, can they use this against you? Blockchain will enhance the workings of our economy, without a doubt. But we don't want "casino capitalism" where we gamble away democracy for the sake of efficiency.

Related: Auditors and accountants are the new custodians of data

Adopt, adapt and protect – auditors and accountants have an important role to play to safeguard data and organisations.

In a democracy we prize personal freedoms. We want people to take calculated risks and test the limits of human possibility. But, what if the fact that you watched porn began to affect your social score and raised your mortgage rate? What kind of leaders will our democracies have in a word where your reactions to films and the behaviour toward lovers are included in your social credit score? What will government deem as “good” or “bad” behaviour?  

Accountants and auditors have a reputation for being pedantic and boring. They are about to become among the most powerful people in our modern democracies because they will define what is accounted for and what is auditable in an era when that means absolutely everything.

Blockchain is the new automated ledger. It does not just track your finances and books. It tracks you. Today, blockchain is being built by young tech geeks who do not know much about accounting and auditing but they do know that data capture pays, so they are grabbing it. The question is, what do we really need and want in a blockchain audit trail?

Getting transparency

All this raises a profound question – what is the desired nature of the relationship between citizens and states and between citizens and firms? What should democracy look like in a world where governments can tax and penalise behaviours without even having to write laws? They can just write algorithms now that our lives are driven by big data.

We can assume privacy is dead. But, do we have to assume that the future is totalitarian? We want “smart” contracts that reflect reality but do we want a world where the scoring system does not reflect our values? Privacy may well be dead but the human spirit is not. Now is the time to decide what kind of audit functions will both preserve humanity and make it easier to account in, and for, the digitised future. 

What history tells us

We will need to think about the uses of accounting and audit trails in the past in order to decide what our future should look like. There may never be another Al Capone again because all his taxes will be automatically deducted at the point of transaction in the e-money, blockchain, auto-data world we are entering. It may also be that Itzahk Sterns of tomorrow will not be able to save Jews from the Nazis. 

You recall that Stern was the man who created “Schindler’s List” and forged documents to show that some 1,100 Jews were experienced machinists and factory operators, in order to protect them from execution. What would Stalin or Hitler or Jefferson or George Washington have done had they lived in a blockchain world? We want transparency and clarity but without sacrificing the kind of governance that protects freedom.

Accountants have been innovating ever since the concept of a ledger and double-entry bookkeeping was invented by Luca Pacioli in the 15th century. Who is the Luca Pacioli of blockchain? It needs to be somebody or blockchain may be the thing that kills democracy. For more on this read American Politics: The Promise of Disharmony by Samuel P Huntington. He says it is the clash between our ideals and our governance that always creates the greatest upheavals in history.

Can we transition from an analogue to a digital world without a clash of civilisations? It may be up to those who design the audit chain in our new digital society.

Pippa Malmgren is a bestselling author, public speaker, economic advisor at DRPM Group and manufacturer of H Robotics. She was a key speaker at the Institute of Internal Auditors Conference 2017 in Sydney. Her book SIGNALS: How Everyday Signs Can Help Us Navigate the World's Turbulent Economy is available here.

This article was first published on LinkedIn.