If it seems like your auditor is always trying out new software, technology devices and analytical testing procedures, you’re not imagining it. Audit firms are continually investing in new technology to facilitate their work. Such advances are ushering in “a transformational era in auditing,” said Steven Harris, a member of the Public Company Accounting Oversight Board (PCAOB), during a recent conference.
But he also warned, “As powerful as these tools are, or are expected to become, they nonetheless are not substitutes for the auditor’s knowledge, judgment and exercise of professional skepticism.”
Accounting firms have been spending around $3 billion to $5 billion a year on technology, according to a recent report. The full effect of technology on the future of auditing is yet to be determined. But, among other things, technology is expected to facilitate audit fieldwork by automating time-consuming manual and rote tasks.
For example, computer systems at accounting firms can now interface with an audit client’s systems to transfer and compile data automatically. Some firms also are using drones to observe physical inventories. Previously, these processes were done manually, often by lower-level accountants.
New technology makes it possible for auditors to analyze large amounts of a company’s financial data and test 100% of a company’s transactions instead of testing only a sample. Sophisticated tools enable auditors to perform advanced analytics to gain deeper insight into the company’s operations.
Data analytics may also allow auditors to better track and analyze their clients’ trends and risks against industry or geographic data sets, leading to better assessments throughout the audit process. This frees up auditors to spend more time scrutinizing complex and high-risk areas that require increased judgment.
Technology could eventually enable auditors to provide a greater level of assurance than today’s level of “reasonable assurance.” Technological advances might even move auditors toward a more continuous auditing and monitoring model, because they’ll be able to access client data in a timelier, standardized format.
In the future, increased automation and the use of artificial intelligence could lead firms to hire fewer junior auditors who previously performed manual tasks. But some firms worry that this will eventually create a shortage of skilled senior auditors, leading to an increase in salaries to attract experienced, high-level staff.
Accounting firms could even find themselves competing with technology companies — such as Apple, Facebook and Google — to attract employees to design algorithms.
Beyond financial reporting
Rapid improvements in audit technology have raised a critical question: Should auditors expand their assurance services into areas other than financial reporting? To make investment decisions, analysts look at a lot of information about a company, including information outside the financial statements, such as 1) environmental, social and governance matters, 2) non-GAAP financial measures, and 3) cybersecurity. Auditors could provide assurance on this information.
PCAOB member Harris advises that auditors use the sophisticated tools, first and foremost, to promote the interests of investors by improving audit quality. He reminds firms that technology advancements can supplement — but never entirely substitute — the abilities of trained auditors to observe business situations and apply professional skepticism.
Sidebar: PCAOB to research effects of advanced audit technology
Given the significant advances in technology in recent years, the Public Company Accounting Oversight Board (PCAOB) recently added technology to its research agenda. The PCAOB is trying to determine whether it needs to change its standards for public companies. This issue was discussed during the May meeting of the PCAOB’s Standing Advisory Group (SAG).
“Certain technologies, such as robotics, artificial intelligence, and distributed ledger technologies, also known as blockchain or distributed database technology, have the potential to disrupt markets and information sharing, which could also cause disruption to financial reporting and auditing processes,” PCAOB member Jeanette Franzel said in a speech at the Annual Financial Reporting Conference in New York.
Potentially disruptive changes will require accounting firms to invest significantly in technology, acquire new management and technical skills, and formulate new business models. These possible changes could also present new risks to audit quality. Stay tuned as the PCAOB continues its research on this hot topic.