Technology and the Future of Audit

Jared Theis

Zettabyte. No, it’s not a made up word or hyperbolic number. It’s a trillion gigabytes or as Cisco’s Taru Khurana 1 put it: “If each gigabyte in a zettabyte were a brick, 258 Great Walls of China could be built.” And that’s just one zettabyte.

Research firm IDC predicts total data in the world will be 175 zettabytes by 2025, compared to just half a zettabyte in 2009. There is an abundance of data and companies have access to similar, if not identical, data on consumers, businesses, and economies. But the value comes not from having access to the data, but actually collecting, transforming and analyzing it to deliver insights that bring real value.

For auditors, it’s a similar story. There is a potential advantage for auditors who are able to harness technology to collect, transform and analyze data, while enhancing audit quality.

How can technology enable a data-centric understanding of companies, industries and macroeconomic risks? How can technology drive sharper data analysis for more thoughtful risk assessment? Can information be analyzed and vouched more easily and quickly in testing?

Additionally, firms want new hires to come equipped with strong technology skills and a global perspective. They understand the Future of Audit is all about humans enabled by technology to maintain the public trust.

They also know that technology-driven disruption places every business on a digital journey to better engage with customers, suppliers, and employees. Audit’s future leaders will be the ones that meet clients on their journey, and bring them new tools and services to expedite that transformation.

Industry and regulatory organizations that have studied the future of auditing and how advanced technologies can be incorporated include the American Institute of Certified Public Accountants (AICPA), the world’s largest member association representing the accounting profession; the Center for Audit Quality (CAQ), a public policy group supported by U.S. accounting firms; and the Public Company Accounting Oversight Board (PCAOB), which sets accounting standards and oversees public accounting firms.

The AICPA is working with the National Association of State Boards of Accountancy (NASBA) on “CPA Evolution,” a joint project for “evolving initial CPA licensure requirements to build a futureready profession for a technologically driven marketplace.” They developed a set of guiding principles to inform a new licensure model, along with specific concepts on flexibility in education requirements and an exam that tests a core knowledge of accounting and technology to support these principles.

The CAQ is working with firms to identify and build a roadmap of skills the next generation of auditors will need. The ability to use new technology is one characteristic, along with an innovative mindset, a global perspective, and strong communication and critical thinking skills. KPMG is addressing this challenge through its Master of Accounting with Data and Analytics Program, which develops accountants for the data age by integrating data and analytics skills into traditional accounting courses.

The PCAOB established a Data and Technology Task Force to focus on emerging technologies impacting the audit. The task force will focus on audit data analytics and artificial intelligence to determine if there is enough information to prompt board action. Areas for research include blockchain, cryptocurrency, cloud computing, the use of drones, internal controls over financial reporting, continuous monitoring, and robotic process automation (RPA).

As larger volumes and new types of information can be analyzed, auditors need critical thinking skills to determine how that data could be best used to identify and evaluate risks. The tools we use to evaluate data to perform quality audit services and also derive meaningful insights that impact our audit need to adapt to this environment. That is where digital solutions are critical to success.

Prerequisites for success

Tapping into technology’s potential requires a technology platform that works with humans. It must also recognize clients’ challenges. For example, bots that extract the specific data eliminate the need to transfer larger, potentially unnecessary, datasets.

Additionally, firms are developing smart audit platforms, such as KPMG Clara, and are exploring the full spectrum of available advanced technologies — including RPA, artificial intelligence, cognitive capabilities, blockchain and others to enhance those platforms in the future. The AICPA is also working on a Dynamic Audit Solutions platform that embraces these technologies and is scalable for firms. These platforms simplify interactions with clients and empower professionals to work smarter. They will drive enhanced audit quality through a rich workflow experience that consistently applies auditing standards, leverages data, and facilitates real-time learning. These platforms will also significantly enhance productivity and provide insights to make better decisions and judgments.

Advanced technologies make it possible for auditors to analyze larger volumes of both structured data, which exists neatly in rows and columns, and unstructured data such as emails, free-text documents and presentations. The ability to analyze both types of data enhances auditors’ ability to identify anomalies, while providing deeper insights into risks.

Digital automation tools —including workflow automation, RPA, and other data and analytics tools can analyze up to 100% of populations to facilitate more robust audit analysis. Instead of traditional sampling methods, this may lead to the identification of specific outliers or anomalies that should be reviewed. The tools augment professional judgment and enhance decision-making.

Machine learning is a vital step beyond RPA because the technology can capture data and identify correlations and patterns. It is also more intelligent than robotics. For example, machine learning can locate specific line items by currency symbol or other keywords, even if the placement varies from invoice to invoice—something robotics alone can’t achieve. The technology could be used to scan huge volumes of information. This predictive analytic is a step toward deep learning.

Natural language processing —a form of cognitive technology that can read and analyze text or speech. It is being used to mine information from emails and other documents. For example, natural language processing can pull mortgage information—property address, appraised value, sale price, and more—from appraisals, memos, emails, and other documents and put it neatly into a data table.

Analytical technology can better assess risk.

Deep learning —full-fledged artificial intelligence, where a machine continuously integrates new information, draws conclusions, and absorbs the learnings to enhance its cognitive abilities. It is seen as one of the greatest potential prizes of emerging technology, though certain considerations should be addressed. For example, it will be critical to demonstrate how the algorithms and technology behind deep learning are valid and robust to understand and document the outcomes derived and not lead to “false positives.”

Cognitive technology —enables the analysis of larger volumes of unstructured data. As one example, cognitive technology can be used to process lease documentation and extract relevant information to assist in assessing the classification, recognition, and measurement of leases. It also can be used to grade commercial loans by absorbing loan documentation to generate a grade indicating the loan’s creditworthiness.

Drones —have been proposed as having potential value in audits, though up to this point, drones have been applied selectively. Drones are well-suited to observe and count assets in certain sectors, such as mining, manufacturing and agriculture, where the client has large physical assets that need to be verified. Drones can also be outfitted with scanners to observe physical assets and inventory items inside facilities that may be challenging or time-consuming for humans.

Smart glasses —or wearable technology, collect and send images seen through the glasses. Rather than an 11th hour flight and a day walking through inventory, teams can go through inventory remotely, while client wears the glasses.

Companies are also implementing new technologies that generate more data, which could be incorporated into an audit analysis, or change the audit itself.

Internet of Things (IoT) —the connected world of data-collecting devices play a significant role, as they may contribute significantly to the amount of data available for auditors to evaluate. For example, in the automobile industry, automobiles may produce data on performance, maintenance requirements, and repairs that also may be analyzed to better assess the risk of a company’s warranty obligations.

Blockchain —when deployed in a company’s infrastructure, can help reduce the time needed to track inventory; allow timely retrieval of reliable distribution information; increase accuracy of data shared among stakeholders; and help determine the integrity of products in the distribution chain. The U.S. Food and Drug Administration led a pilot with IBM, KPMG, Merck and Walmart to use blockchain to identify and track prescription medicines and vaccines distributed within the United States. Blockchain adoption — and the many iterations of blockchain technologies — may change the audit itself, elevating and changing the nature of control testing.

What is the impact on audit quality?

There is a clear consensus among audit professionals that the array of new and emerging technologies can enhance audit quality. Additionally, a clear understanding between companies, standard setters, and regulators is essential. The technology can enable auditors to focus efforts on the outliers and anomalies, devote greater time to areas of higher risk and have meaningful conversations, resulting in enhanced audit quality. Even with these new technologies, the need for human judgment and professional skepticism will always be necessary.

1. Barnett, Thomas. “The Zettabyte Era Officially Begins (How Much Is That?).” Cisco Blogs, Cisco, 11 Oct. 2016, blogs.cisco.com/sp/the-zettabyteera-officially-begins-how-much-is-that.

Image © iStock/berya 115

Jared Theis, CPA, is Director, Accounting Advisory with KPMG LLP and Vice Chair of the WSCPA Board of Directors. You can contact him at jtheis@kpmg.com.