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Auditors turn to technology to meet new challenges | Caseware |Image of two auditors collaborating at work on a computer
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Auditors turn to tech to meet new challenges

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John Stokdyk takes a look at the challenges auditors face and how they are adapting their methods to cope with client demands, pressure on staff, fees and regulatory change.

20th Jun 2023
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Aside from economic problems that always increase the workloads of auditors, the profession in 2023 is dealing with a perfect storm of resource shortages and regulatory obstacles.

The audit profession is going through a period of unprecedented change. Some of the regulatory issues it faces stem from reforms the European Union introduced following the global financial crisis that restricted the provision of non-audit services to public interest audit clients and imposed audit retendering every 10 years.

Yet those measures failed to stem a continuing flow of corporate accounting scandals and collapses in the UK including Autonomy (2012), BHS (2016), and Carillion (2018). The growing audit expectations gap prompted a series of formal reviews, reports and academic studies of the sector in 2018-19.

Most notable among them, the Financial Reporting Council’s independent review led by Sir John Kingman put forward 83 recommendations in 2018 to address audit shortcomings including lack of transparency and weak enforcement. The government accepted many of these suggestions and promised to set up a new regulator, the Audit, Reporting and Governance Authority (ARGA). As yet, ARGA has not been formally established to implement all these reforms, leaving the profession in a regulatory vacuum.

These headline interventions and concerns around risks have made top-end auditors more circumspect about taking on new clients in the increasingly volatile public company audit sphere. But the impacts are also filtering down to the rest of the audit profession and reshaping the profession’s technical foundations. 

Technical implications

According to audit reviewer and technical lecturer Jez Williams of Apex Professional, the challenges facing audit firms are both technical and practical. 

The revised version of ISA 315 became effective for periods beginning on or after 15 December 2021. The focus here is on how firms assess risk and test their controls. “The conceptual differences aren’t huge, but the emphasis on understanding clients and especially their systems and controls including the use of IT and identifying and assessing the risks that arise is stronger, so firms have to jump through hoops to prove why they are doing what they are,” Williams said. 

“All these changes have left firms on the back foot when it comes to training their teams and we’re seeing that in the quality of files. Sometimes there’s a failure to understand what the methodology is asking for, or to apply the actual standard itself.”

Skills shortages

On the practical front, “recruitment is huge”, added Williams. “New entrants know all the standards are changing and the profession is going through a reputational slump as a result of all the scandals,” he said. 

For many firms, audit is no longer seen as lucrative or rewarding. “Many practitioners are getting to the point where they are thinking they have had enough of audit. I wouldn’t be surprised if a new wave of firms decide to pull out. We often see that when audit limits go up or new standards are introduced,” said Williams.

Thanks to all the regulatory reviews, audit was a canary when it came to the accounting profession's skills and resource shortages. The solution according to Sir Gordon Brydon in his review was to turn auditors into professionals in their own right, rather than a subset of the accountancy profession. 

Until ARGA is fully up and running, however, there is no independent body or professional framework to direct the development of the new, separate audit career option and the attraction of audit is languishing compared to more lucrative and interesting careers such as forensic accounting, cybersecurity and consulting. 

During her year as ICAEW president, Julia Penny talked to many students who were anxious about the ethical challenges they might face within audit. “And wherever I have been there is concern that the staff just aren’t available, and that audit could become an unattractive career option,” she said.

Client expectations on service and fees 

The notorious audit expectations gap arises from the belief in wider society that auditors will prevent fraud and curb management misbehaviour. That is not how the process and standards of professional practices operate, which fuels the perception among shareholders and managers that they don’t get much value from an exercise they only have to endure because the law says they have to. 

As Caseware’s Anatomy of an audit whitepaper illustrates, this negative view puts auditors on the back foot when it comes to fees, meaning they have to find new ways to deliver their services efficiently if audit is going to remain profitable.

Audit automation 

Auditors are also being drawn into the orbit of cloud-based accounting systems, where their tools can plug into journals and trial balances online to create a collaborative environment. According to Caseware’s 2023 State of  Accounting Firms Trends Report, cloud accounting tools top the list of planned technology investments at 35% of firms. That trend is part of a global phenomenon. 

Many audit practices are clearly choosing automation as a path to help them overcome the obstacles they face, with a new generation of integrated cloud audit tools bringing shared access to working papers and analytic tools to audit all transactions rather than samples.

Tech can help hard-pressed audit practices not only maximise the potential of existing teams to counteract the audit talent shortage, but also meet the expectations of younger auditors, noted Caseware’s Charlotte Gambling. “Graduates aren’t interested in legacy processes, they want up-to-date software like the systems they trained on.”

These benefits were the motivation for top 40 firm BHP Chartered Accountants, when it implemented the Caseware Cloud Audit application. The pandemic exposed the difficulties of using server-based solutions for remote audit work, according to Maisie Poskitt, whose role is Head of Amazing at BHP.

The software’s combination of intelligent technical content and analytics with “hands-on” optimised work processes put the firm in a better position to hire and support staff for remote audits, she said. 

“You’re able to tie in all your checklists or your risks into what you’re doing in the documents. So it’s a great way to teach practical skills to our new hires.”.

According to Williams, meanwhile, there is also a lot of interest in using artificial intelligence within audit, although this is still only really happening among the biggest audit practitioners. Yet it’s a mistake to think that technology alone will solve all the professional's challenges, he said. “The danger of putting all our hope in new technology is that we’ll forget to think about what we’re doing. The new ISA is trying to get auditors to think about what the issues are, not submerge them in new forms. For the time being, I’d love to see more ‘natural intelligence’ in audit.”

Caseware’s 2023 State of Accounting Firms Trends Report gives you the information you need to ensure you and your firm are successful over the coming year in an industry that’s experiencing exciting changes and opportunities.

 

Replies (1)

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Danny Kent
By Viciuno
19th Jun 2023 13:57

The problem with blaming the expectations gap is that the regulators are saying they are doing a terrible job as well. They are not doing a good job and joe public think otherwise. Some of the errors are stupidly obvious as well (like not checking bank accounts).

No independence. Incentivised to turn a blind eye.

Automation isn't a replacement (at the moment) for a human.
No critical thoughts at all. It isn't really that good to be honest, we just jump on the band wagon as it's cheap and everyone is happy to accept the errors as immaterial. Think of a Tesco fuel receipt that goes to Dext or Hubdock, it will be categorised a motor costs - despite the fact that it may actually be for an ice-cream, todays paper or include nappies. Errors by humans can easily be made, and lost behind layers of automation. Bank rules set up wrong? Allocating to wrong place, incorrect contact, VAT claims with no evidence?

Automation also means that the trainees don't really understand what is happening - the computer does it all for them. So when there is an issue, they have no idea what could have gone wrong, or how to fix it.

In saying that, I'm not an auditor - so could well be whatever box ticking exercises they do can in fact be done by a computer?

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