At the end of the traditional auditing process, the main output was identical: a signed piece of paper from the auditors saying the accounts were materially true and fair.
Ultimately, it didn’t matter very much how the auditor arrived at that signature or even how long it took. The sign-off was the only thing the client wanted and expected.
Any recommendations provided by auditors were delivered in management letters, which were often an afterthought to the audit and limited to basic operational issues.
The rapid uptake of digital auditing solutions today is changing these client expectations and the fundamental nature of the audit.
Yes, clients still need the auditor’s sign-off for compliance. But the improvements and efficiencies from digital auditing can now transform the quality of the work, enabling the auditor to not just tick the box, but empowering the auditor to uncover valuable insights as a natural part of the process.
Much of the talk about the future of accountancy is about how technology can automate menial tasks, empowering the accountant as a trusted advisor and source of strategic advice.
Rather than saying that compliance is a dying market and firms should move beyond it, digital tools can instead transform compliance to make it a key advisory service that clients are prepared to pay more for.
For example, some organizations are today experiencing the greater efficiency of digital auditing, while having their eyes opened to the range of insights their auditors can now deliver beyond the traditional management letter.
Using digital auditing tools, accountants can identify issues such as inefficient accounting processes, or give insights into key performance indicators by leveraging benchmarking. Or perhaps the client’s KPI’s around receivables are out of sync with their industry and improved process or policies could quickly unlock working capital.
These kinds of additional outputs beyond a traditional audit and are highly valued by clients. They are causing a growing trend where clients are increasingly choosing auditors based on their digital capabilities.
Digital can also move auditing closer to the goal of a highly efficient continuous audit driven by automated data feeds, which has been both a technical challenge and economically unviable in the past.
Previously, no clients wanted a continuous audit because of the lack of perceived business value, while no audit firm could deliver a continuous audit in a commercially viable way.
Data is the key
At the heart of the digital audit is the ability to harness data to enable and empower the auditor’s business acumen.
This unleashes automation, a more rigorous approach and big picture macro perspective, as well as transaction level micro insights which may have previously gone undetected.
It is often said that 90% of the world’s data has been created in the last two years. Many organizations are drowning under a tsunami of data which will be useless unless they use the right aggregation, analysis and visualization tools to turn the data swamp into a clear lake. These kinds of innovative tools are now becoming available to auditors.
In the past, a traditional audit looked at only a small percentage of the data and a limited number of transactions. This greatly inhibited an auditor’s ability to uncover unusual items or patterns and develop unique insights.
By optimizing data analytics through digital auditing, the auditor can now efficiently analyze full data sets. This combination of automation and emerging technologies allows the auditor to analyze every single transaction.
Instead of facing a “needle in a haystack challenge,” data analytics essentially equip the auditor with a giant magnet as the haystack goes through the thresher. With little or no manual effort, any metals are automatically pulled to the surface where they are clearly visible.
The data-driven digital audit process is not only more comprehensive, but it is more efficient in identifying and dealing with risk. It tells stories using data visualization tools, giving the client something far more valuable as an output from the audit process.
Without the need to spend time on menial and manual processes, the advisory skills of accountants are accelerated, making the role more interesting and fulfilling.
This is important to an accounting profession battling to attract the best talent, and where technology advancements in other industry offers new and exciting opportunities to young people.
Drivers for change
The biggest inhibitor of firms moving to the digital audit is status quo and a nervousness for change.
While doing nothing may be seen by some as a viable option, there is a growing impetus for digital auditing which is quickly gaining momentum.
The need for moving to a digital audit is coming primarily from two key sources – regulators and clients.
Regulators have responded to high profile fraud cases and business failures, with comprehensive reviews which focus on audit quality. These reviews have unanimously agreed that the current audit process is not fit for modern purpose.
The 2019 UK Government Independent Review into the Quality and Effectiveness of the Audit by Sir Donald Brydon was one of those reviews, responding to high profile corporate failures, including construction giant Carillion, and called for a fundamental shift in auditing and the information auditors should report on, beyond the core financial statements.
These changes directly address the audit product and the way the audit is performed. The reviews identify technology as a key component of how firms can meet the changing expectations of regulators and the business community.
On the client side, many organizations are now well ahead of their audit firms in terms of digital maturity. They are increasingly expecting their auditors to be at least on par, if not ahead of their own adoption of progressive technologies. This is driving demand from clients, who have seen the tangible advantages that digital auditing can deliver, towards more progressive audit firms.
The COVID-19 pandemic has also added to this momentum as businesses move to remote and hybrid working.
With auditors unable to spend as much time physically on site, they have needed remote access via flexible tools. This has exposed the desktop and legacy software solutions many firms were using and acknowledged were near to their end-of-life.
As firms take a cold hard look at their technology stack and jettison much of their legacy, they are seeing the benefits of moving to digital technologies which are driven by data. Rather than making smaller, incremental steps firms should maximize this once in a generation opportunity to embrace a broader modernization of the traditional audit process.
Leveling the playing field
The very largest global accounting firms have been working with new auditing technologies for over a decade but use these tools and solutions in house as part of their competitive advantage.
Smaller firms have been unable to make the same technology investments to match the big players, resulting in the competitive status quo being largely maintained.
Inflo has built an end-to-end digital auditing solution from the ground up, powered by cloud technology and available to clients as a service.
Our solution is built around four pillars which together improve the audit process and deliver better outcomes. Those pillars are efficiency, quality, staff experience and client value.
The Inflo platform drives efficiencies across all aspects of audit work and client delivery – reducing time spent on repetitive and mundane tasks through automation and minimizing human error through embedded checks and balances.
It improves the quality of work though analysis of 100% of transactions rather than sample testing and enables the secure transfer and management of data in compliance with standards and best practice.
In terms of the staff experience, our technology is more engaging for the future generation driving creative thinking and critical decision making.
And we drive enhanced client value through a secure, efficient and transparent process which, delivers valuable business insights all year round.
Our vision is to make next generation digital auditing tools available to the wider profession at scale, for the benefit of the entire profession rather than remaining the unfair advantage for a few.
This gives smaller and more agile firms a chance to compete based on their ability rather than their size, while the wider adoption of new technology will deliver benefits to the daily working lives of accountants, the value they give to their clients, and help raise the reputation of auditors.
That will move the dial not only for the profession, but have a positive impact on the broader business community that auditors and accountants underpin.
About the author
Mark is a member of the Advisory Panel to the International Auditing and Assurance Standards Board’s (IAASB) Technology Working Group as well as the Reference Group supporting the development of the IAASB’s new standards for auditing less complex entities. He also leads an American Institute of Certified Public Accountants (AICPA) working group to tackle innovation barriers through advancing data standards in the US.
Mark has a strong passion for advancing the skills and expertise of his peers in the profession and Inflo now plays a key role supporting education of the profession, including within the ICAEW’s Chartered Accountant qualification.
Hear more from Mark
Join him for the Inflo’s Future Firm Series Webcast Part 4: Maximizing the shift to digital. During this session, you’ll realize the benefits of a truly digital audit process and considerations for your firm.
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