ICAEW Engine B investment: A conflict of interest?
Richard Sergeant investigates the ICAEW’s investment into Engine B, and whether CEO Michael Izza joining its board represents a conflict of interest.
The ICAEW’s recent additional investment into tech start-up Engine B was perhaps largely unnoticed by many members. Taking a 10% stake and Michael Izza joining the board seems an unusual step for an institute to take.
Aside from the potential conflict of interest, historically, accounting institutes and major tech initiatives have largely been a failure. How will this investment stack up?
Getting to grips with Engine B and what it aims to do isn’t easy. The website is quite opaque and subsequent press releases unhelpful, especially as it describes itself as an “intelligent data access platform” using “dynamic knowledge graphs”.
Put more simply, Engine B seems to be two things:
- A set of rules (or data models) that help to standardise structured data (like financial accounts) and unstructured data (such as PDFs).
- A technology platform, that allows this data to be interrogated and for other software to be linked to it.
A new format to drive competition in audit
According to ICAEW technical manager David Lyford-Smith, one of the most obvious applications for this is with audit. For example, “Making a data model that company data fits into what accounting data should look like and represent – that can then be utilised regardless of the client and audit software used.”
Ultimately, this would be intended to benefit the broader audit market. “This should help reduce the significant barrier to entry for smaller audit firms as data extraction and collation is simplified, and the switching cost for entities as they don’t have to change the format of their data.”
In simple terms, if you can gain traction with the standard and convince the software companies to adopt then you could theoretically create an ‘export in EngineB’ format as you would a CSV, that could then be utilised by analytic and audit software. It would reduce a huge overhead in the process.
Why an investment?
If this is broadly about creating a new technical standard, the question remains, why was financial investment needed?
According to Lyford-Smith, “We want to fund them because what they are doing is valuable and useful for the whole audit industry. Being an investor we have more of a say in the way it develops and how we can represent the interests of our members big and small.”
Let’s also not forget that this is a start-up, and ICAEW investment would seem to be providing some of the early-stage capital required to continue development, as well as substantial credibility to its aims.
But, also like other investors the commercial returns further down the line could be very attractive.
Conflicts of interest, or a genuine opportunity?
While the standards are intended to be in the public domain, the commercial route is inevitably via software. While Lyford-Smith understandably focused on the paternal aspect of Engine B, he acknowledged that there will be “commercial tools”. While not at the level of sophistication of some of the deep analytic tools, this Engine B video highlights some of the basic fundamentals that are already in place for risk assessment and interrogating data.
While at some point there could be a commercial conflict with other software providers, Lyford-Smith is keen to stress that their interest is at the ‘foundational layer’. He stresses there is no conflict with the audit itself as “this isn’t the standards of the audit, we regulate the professional behaviour, in the same way we don’t regulate Excel formula creation.”
Being involved at the fundamental level does have it’s advantages for baked-in rewards if Engine B can prove itself commercially. Especially as this recent release makes clear that the interest goes beyond audit, to legal, insurance and tax on a global level.
If the ICAEW does lose out in any shake-up of the audit market, from which it has netted substantial sums through their share of fines and costs over the years, then this could go some way to keep skin in the game and continue to benefit financially.
Accounting institutes and big tech projects
Even though Engine B has collated a highly reputable group of tech businesses, academic institutions, audit firms and of course an institute - it doesn’t mean commercial success is guaranteed.
Project Kairos was backed by the Chartered Accountants Australia and New Zealand (CA ANZ) which ultimately looked at aggregating huge amounts of client data for sophisticated benchmarking and analytics. But it cut its losses to the tune of $1.6m in 2018, after the project collapsed.
Accountants like Paul Meissner, invited by CA ANZ to help shape the project, concluded that it was “too focused on the marketing potential of being seen as innovative and not on what small practitioners needed”.
Significantly, the ICAEW may even have a rival in the AICPA joint venture with CaseWare-owned OnPoint around audit and assurance. Having detailed involvement with major US firms and investing some $50m to date, it follows a very similar path to Engine B. But it could now dwarf the UK effort after accounting market investor behemoth HG Captial’s recent strategic investment in the Canadian business.
A balancing act
Many questions remain. Will this affect the institute’s right to seek commercial partnerships, and to uphold the integrity of the audit market place when it has been under so much scrutiny in recent years?
How well it can manage to balance its role of regulator, standards supervisor, innovator, and commercial partner? And is there actually a positive use case for all members, rather than a narrow (and highly influential) constituents of large firms in audit?