Q&A: MindBridge on the future of audit
In this question and answer interview, Nick Levine talks to MindBridge director Rachel Kirkham about how the audit process is likely to change in response to public expectations and technological advances.
Recent corporate audit failures such as Carillion, Patisserie Valerie and Wirecard have renewed the focus on audit shortcomings. Changes in competition rules and a revamped regulator have been formulated, but while we wait for the formal launch of the Audit, Reporting and Governance Authority (ARGA), yet more government reforms are expected in response to the Brydon, Kingman and Competition Market Authority reviews.
With so many possibilities in the air, I sat down with MindBridge AI solutions director Rachel Kirkham to discuss how audit is likely to evolve over the coming years.
NL: What more do you think can be done to communicate the importance and purpose of audit to wider society?
RK: I don’t know if all of the recommendations from the three audit reviews will be put into practice, but one of the things quite likely to happen is for audit to become a distinct profession. If audit is going to be reborn, that is the time to really start promoting the profession and the benefits that it brings.
In a world dominated by fake news it is more important than ever to have an independent profession dedicated to keeping corporates honest.
Audit adapts to remote work
NL: Many companies that I know of had their audits completed externally during the pandemic. Do you think remote working will change audit and do you foresee any challenges - like how do you perform a stock take or complete an asset register remotely?
RK: Fundamentally the profession is well set up for remote working from home as auditors usually are travelling around the country. They are already set up for working remotely, but up until now, this has been from a client’s location as opposed to from home.
With an increasing amount of what industry does becoming digitised, this creates the opportunity to reassess what constitutes audit evidence.
NL: How do you think technology can increase the efficiency and quality of audits?
RK: Efficiency and quality almost go hand in hand. We are at a point now where there are advances in machine learning techniques which mean you can automate and deepen the kind of analysis you can do on the kind of data you get for audit.
Advances are being made all the time on the accuracy of machine learning methods, but I also think we are starting to build an understanding of how you codify the knowledge of an auditor. Some of the accounting standards have become quite prescriptive and they are starting to create less room for judgement in some places. Once you get to that point where things are systemised, you can put that into a digital system.
Corporates are starting to generate a larger digital footprint. I think utilising all that available information is going to become imperative. Problems can arise if there is a discrepancy between what companies put in their financial statements and someone finds something tweeted or a press article which doesn’t match to the statements.
NL: And so do you foresee a case to be made for audits scraping social media data in the future?
RK: Yes. You have an information hierarchy, and some information is of better quality than others. Information which comes from an open banking API is definitely true and comes directly from the bank, whereas someone’s comments on Twitter will be less reliable. It’s about bringing together all of that information in a coherent way to make assessments on it.
When I was doing audit seven years ago, we did related party testing and conducted Google searches to make sure we didn’t find anything untoward. Computers can ingest a lot more information than I could from a cursory glance at Google.
Large multinational companies deal with millions of transactions. You need to use more advanced methods as any sample you select may be statistically valid, but you are still examining a really small proportion of the transactions. Being able to draw audit conclusions on that made sense when you weren’t able to handle big data; there isn’t a justification for this anymore.
NL: Do you think the regulators are doing enough to acknowledge the use of technology?
RK: I think regulators can be quite cautious about this. The Financial Reporting Council published a discussion paper last year that asked for more feedback on what they should be doing in this space.
There is probably a need to give more guidance on how people can use analytics in audit, what skills auditors need, what competencies firms should have and what usage is acceptable. I don’t think the standards necessarily prevent people from using these tools.
New skills needed
NL: Do you think technology changes will require a new skill set from auditors – for example skills related to technology such as data science?
RK: I do think it is always good for auditors to know a bit of programming, if only as it teaches them the core concepts needed to understand the mechanics in play when they are using software tools.
They don’t need to become programmers, though. I think they need to have a much stronger understanding of statistics as fundamentally you are using a tool which shows what the outliers are, but you need to understand what that means.
At MindBridge we call this skill set “data literacy.” When tendering for audits, firms should talk about the associated investment and training in their staff, alongside how they use technology within their audits.
Data literacy is about being able to build the right mental model to interpret the results. People won’t have to build their own analytics tools, but they need to be able to communicate the findings clearly. Turning complex financial analysis into a consumable non-technical summary will be a key skill for auditors going forward.
The more we automate audit, the more important the human interaction element becomes. Taking the time with the client to explain what you have found and giving feedback will become increasingly important as client relationship management is a skill in itself.
For audit to fulfil its role in society and restore confidence in its application and purpose, changes will need to be applied via a combination of both technology and humans. Technology in itself is not a silver bullet, but an enabler.
For best practice humans should leverage the efficiencies from the data processing power to identify anomalies and then apply their own professional judgement. When it is founded, the new audit professional body will need to take into consideration the impact of technology on the core skills auditors need to be effective to provide an effective public service.
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Nick Levine is a chartered accountant and journalist, with a particular interest in fintech. He was formerly the Advisory Lead at Deloitte’s Propel and the Head of Enterprise for ICAEW. His writing portfolio includes The Times, Wired and Real Business.