Audit Forum 2020: Why (and how) we must adopt a next-generation audit now

Recent headlines don't look good for auditors. From Wirecard's missing billions to Luckin Coffee’s false revenues, a series of high-profile accounting missteps have damaged the reputation of the function in the eyes of the public. 

The future of the profession may be in question should the embarrassments continue, and with the coronavirus pandemic continuing to disrupt our economy and the way we work, there are difficult conversations to be had about where audit goes from here. 

With so many uncertainties swirling, Confirmation, which is part of Thomson Reuters, assembled a panel of professional experts to discuss these topics and more in our virtual audit forum: The hard truth facing CPAs: Why (and how) we must adopt a next-generation audit now

Confirmation's founder Brian Fox was joined by leaders within the audit profession, including Carl Mayes, associate director of CPA Quality & Evolution at the AICPA; Jason Whitmer, partner in-charge of Crowe's Centralized Audit Services Team, and Michael Peters, chair, Accounting & Information Systems and the Alvin A. Clay Professor of Accounting, Villanova School of Business. Keeping the panel on their toes was moderator Kelly Richmond Pope, CPA, professor of accountancy at DePaul University, and documentary filmmaker on white-collar crime. 

If you missed the live event, or just want to revisit this engaging session, you can watch it and read through our main takeaways below.

It’s time to get forensic 

How do you solve a problem like audit failure? By admitting it is a failure in the first instance, Michael said. Auditors need to accept they have dropped the ball and evolve from a task-oriented mindset to a more investigative, probing style.  

"It's time to move on from the old way of how auditors think, to more how a forensic auditor thinks; to embrace and resolve uncertainty," Michael said. With the level of data and analytics at hand, it's time to be more inquisitive, to embrace and resolve uncertainties, he said.  

To not do so is to risk further damage to the reputation of the sector, the panel agreed. "If you ask the public if we are winning the war on fraud, they will say no, but ask any auditor and they will say yes, so we have to bring that gap and make it smaller," Kelly said. "It feels like we are resistant to change; we know best, and we don't need to change." 

Earlier this year the boss of a large accounting firm said it’s not the job of the auditor to spot fraud, however, Brian disagreed. He said it's high time the profession admits that finding fraud is its responsibility. "It's what the public expects out of us," he said. "You see it in the headlines: 'audit failure.' We disguise it as 'audit quality,' but it's a euphemism for failure. We have a responsibility to find material misstatements that would have changed an investor's decision - that is our job." 

The accounting profession is truly at a crossroads and some may be questioning how it can progress given the culture hasn't really changed in hundreds of years, said Carl. "We all believe audit will continue to be important to capital markets, but the question is how do we unlearn and relearn this new approach? We do it with professional standards all the time, and so we need to take the same kind of approach with audits," he said. 

Change is a necessity 

Some of the most difficult decisions facing CPAs today are around which technologies to adopt for their practice, knowing that implementing machine learning or AI may mean a wholly different way of approaching certain jobs. As Jason said: "There is a lot of change in the industry, and it can be overwhelming. One of the challenges is figuring out which direction you go first. Once you do that, there is another direction to go. It's not easy" 

The worst thing to do, the panel warned, is to stand still. 

"By human nature, we don't embrace change. We are a little resistant," Brain said. "Older CPAs often just want things to stay the same; they don't want to invest in technology because they won't see the return. Eventually, your staff will step out and start their own practice, and the value of older firms who do not adopt technology starts to decrease because nobody wants to work with or for them. It's a two-edged sword." 

It doesn't have to be a case of adopting new technology for the sake of it, said Jason. "Know your clients, know the tools," he said. Ultimately firms that understand their clients and know what tools and applications are out there are better placed to make a decision that will result in efficiencies. "You have to plan each engagement," he said. "Know that one tool is not the right one for every job. You definitely have to understand what is out there, what is available." 

It may take retraining, Kelly pointed out, questioning the panel on how realistic the concepts of retooling, retraining, and relearning are for experienced CPAs. "It's human nature to be stuck in the way you are thinking, so how do you stay current, get on the innovation train and ride it all the way? It may scare practitioners that they think they will have to start from scratch and completely retool," she said. 

Get comfy with data 

To be an auditor of the future, understanding and being comfortable around Big Data is unavoidable. 

"It all starts with data," said Jason. "You need to understand the data your clients have and how to use that, as you can identify trends and information you would not have otherwise been able to see. You have to get comfortable with using data and developing ways to use data techniques in your audits."  

Next-generation audits will require firms to understand how to get that data, how to store and protect it, and how to use it and interpret the results. The students of today, who are the auditors of tomorrow, are already coming through the ranks with a different skillset to their predecessors, said Michael.  

"Machine learning and AI are taking place in audit very quickly," said Michael. "I see this technology replacing that first year of audit work, of routine, mechanical tasks. We are in a transition period." 

Much of this will involve investment in training, and again, the accounting professionhas to face that the world has moved on, the experts felt.  

"Everyone wanted to go work for Big Four public accountants at one time, and technology wasn't the cool field it is now," Kelly said. "You couldn't bring your dog to work or wear a hoodie. Culturally the accounting profession hasn't changed so much. Accounting seems to be more conservative, but we have to be willing to adapt, have a change mindset as well as a growth mindset, and be open to some of those things." 

Covid will accelerate innovation, but at what cost? 

Grappling with what the audit function looks like in a post-Covid world, for Jason, the uncertainty and disruption caused by the pandemic has accelerated changes already afoot. 

"It has clearly sped it up to innovation; there are things we are having to do now we didn't in the past, and often we are asking why we weren't already doing this," Jason said. It is also testing traditional views of how audits should be carried out and throwing out scenarios that were once unthinkable. 

"In the profession, there is a deep-seated belief that you have to be physically present to audit," he said. "For some yes, but we also found audit work can be performed remotely just as effectively, especially when you employ data-driven techniques." Virtual inventories were something at one-time anathema, but in some cases, it is proving the only option, he said. 

"Something that makes me nervous as an audit chair is Covid," said Kelly. "We are in this state where audit has changed maybe forever because of it." She pushed the panel on how the pandemic, combined with the quickening pace of change, was making the landscape more attractive for fraudsters. 

The danger, Brian pointed out, is such volatility and uncertainty plays directly into the hand of fraudsters, just as it did during the last financial crisis. "In the Covid environment, one thing I always say is 'think like a fraudster.' Put your fraud hat on and look to see if the environment is better or worse for fraud; it's much better," he said. Businesses have to think about what they are doing differently than a potential fraudster could manipulate and utilize; how is the confirmation process altered by remote working? Can it be even be strengthened in the current environment?   

“The ultimate scorecard is when we see the headlines about catching fraudsters and when we celebrate the firms who are catching fraud, then we’re doing our job,” Brian said. 

Think of this as an opportunity 

If the world is facing a Great Reset as a result of the pandemic, there is no better time for the audit profession to push forward and futureproof, the panel said, and there is positivity in the air that it can emerge in better shape. 

"I'm optimistic," said Carl. "There is tremendous opportunity and demand for this profession. Leveraging data is an area of expertise for auditors and there is a huge opportunity for us to take advantage." 

Michael said he sees a lot of firms taking things seriously, especially with the regulators cranking up the pressure, and is encouraged by CPAs showing bolder thinking and better leadership. "Culture is very important in any organization," he said. "Create the culture and move toward that. One or two people in a division or organization can make a big difference." 

The technology is there, the will to change is there, but can words translate into actions, Brian questions. "I am optimistic we have the technology, but fearful we aren't moving fast enough," he says.  

The risks of not moving with the times could pose an existential threat to professional audit, he said. "If we don't start living up to the public's view of what our job should be, I am concerned we will have an Amazon, Google, or Ant audit. Investors will open up our exclusive rights to audit and say because we're so bad at it we will just let anyone do it. If we don't get better at finding material statements for fraud, we risk the future of our business." 

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