A conversation with Al Anderson: Leveraging data to drive change in audit

In our new video conversation series, Inflo CEO Mark Edmondson sat down with Al Anderson to talk all things audit.

Al has had an extensive and successful career in the auditing profession spanning over three decades, having been a partner with two large US firms, serving as a Senior Vice President with the American Institute of CPAs, and most recently is the founder and President of ACCOUNTabilty Plus, one of the world’s leading audit consulting firms.  Al has also been recognized multiple times by Accounting Today as one of the Top 100 Most Influential People in our profession.

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Al had plenty to say about the changes that firms need to make and how accountants need to evolve so they don’t get left behind. Here are some of the key themes discussed in the session:

What areas do firms need to make changes?

To change, firms have to start with the data.

For Al, once firms begin working in the data, they will see the power that unlocks for them in terms of understanding the client’s business. Most firms are not prepared for auditing in the future and do most of their audits in a very traditional fashion. They tend to be balance sheet focused and start their audits with the balance sheets and drill in. Firms need to be ready to be data-oriented auditors as opposed to balance oriented auditors and that’s a major culture shift for a lot of firms.

“Firms have acquiesced to the audit being a commodity.  They must look at this differently.”

He went on to say that auditors must have or build the skills to provide additional value, including a data mindset and business acumen.

Leveraging data

Take a commercial enterprise for example. It would be illogical to not use all of the data that is captured as inventory transactions take place, as sales and receivables occur on purchases and payables take place – there is so much power in the data there. Often enough, attention is not being paid to the fact that they all work together.

Al suggests that you can leverage all of this.

The general ledger has a tremendous amount of data in it, but most firms will only use data sometimes to do quote journal entry testing but that’s just scratching the surface. You have to drill into it the data and say, how do transactions take place?

“When I move firms to a data driven audit and we go through a debrief on how transactions take place and what general ledger accounts are impacted as a result of that transaction, I’ve had partner after partner come to me after that session and said, I can’t believe how little we know about this client.”

If you only know a balance and you go in and sample it, you don’t really learn that much about the business when you do it that way.

Al states that the tools out there are so powerful. All you have to do is take the time to understand what you want to accomplish and find the tool and the technique that can help you accomplish it and then let the younger staff go and explore it.

Moving from paper to paperless

In reality, most firms are using technology as a repository, not a tool to enable a much more effective and efficient audit.

What we’ve been hearing from a lot of firms recently is that the barriers to innovating and pushing forward their old approaches fall into two areas:

  1. The first is the methodology that they’re ultimately using to drive the audit process – it’s designed for more of a checklist-based mindset (a traditional audit approach) and therefore it can be quite challenging to try and work out where a new and innovative technique actually fits into that process, and it runs the risk that that new and innovative technique becomes an additional thing you do is not really replacing anything.
  2. The second has been in the audit platforms themselves. A lot of firms see the audit platform is simply a technology repository to put what used to be a paper-based approach into a paperless approach.

Firms must migrate away from this approach and let technology be the ultimate enabler.

“Firms should give themselves an opportunity have a clean slate. Start without a checklist and build the audit to accomplish the objectives and flush the balance orientation, diving into the data.”

A combination of technology and fresh thinking can result in significant efficiency, greater value, greater knowledge, and staff that much more excited about their daily job.

Attractiveness of the profession

We’re seeing so many graduates joining a CPA firm that are incredibly tech savvy and digitally orientated and using various applications on their phone day in, day out. But it feels as though we’re all too often putting them into a very analogue world where we’re asking them to carry out the audit process or a tax engagement in the same way that the partners and senior staffers did when they joined the profession. With this approach we run the risk of the profession becoming less attractive to those individuals, to them not staying in this profession and gravitating towards other more exciting professions.

What can be done to remediate this?

Bring in R&D audits

Al mentions that he works with firms to do ‘R&D audits’ – taking a team, a blank sheet of paper and carry out an R&D. It’s not done in a think tank and hypothetical approach but on a real live client. The fundamentals are that you comply with standards, you issue appropriate opinion, but all the steps that you take in between are open for debate and discussion.

“When I’ve worked with firms that have done R&D audits, I have had accountants approach me and said that if our firm hadn’t done this, I was considering leaving my position. Auditors that are comfortable in filling out checklists will stay with the firm, but the focus should be on keeping the best and the brightest and the individuals always trying to innovate as they are not going to rest and stay with a firm that is unwilling to change.”

Needle in a haystack

Firms need to relearn their whole thought process and really use technology to eliminate the mundane activity and elevate the skillset of the CPA and the auditor to providing insight and knowledge.

As firms move down the continuum, they are stuck in a ‘compliance’ service, but need to migrate towards a ‘client’ service.

As such, Al believes that the acronym of audit and accounting is going to change and move to search and advisory. Audit and accounting will still be there but will be different and that’s because firms will want to provide assurance on the integrity of all that data. The tools and techniques that are out there are powerful to help support our understanding of the integrity of that data. If there is some lack of integrity in the data, it will point it out right away – your needle in a haystack point.

“In a data driven world, auditors will want to find all the needles. The problem is, do auditors have enough knowledge about the client to know whether one of those needles poses an issue? Or whether it is something that is acceptable because of a nuance in their business?”

And so, the unlearning of ticking in time will be a breath of fresh air for young auditors. The knowledge that they can acquire and learn about the business is going to be huge and that’s going to make their whole role and relationship with a client better.

How key is the firm’s methodology to driving innovation in the old approach?

A lot of technologies that are currently available don’t talk to each other and don’t talk to the methodology. The more they’re integrated, the better off things will be.

Al discussed that methodology that’s written to comply with the standards under the paradigm of a balance sheet orientation. In a real-time orientation, those are going to be powerful, especially when it’s overlaid with a technology that can actually avail itself of all the data and help move it all around and help with the number crunching.

“The methodology that firms are currently using are designed off a predominantly balance sheet orientation. There’s no methodology out there that talks about a data orientation, so any tools and technologies that has a data-oriented methodology and then the underlying technology to support it will be a significant advantage for firms.”

One area for firms to focus on first

Word of advice from Al – don’t wait, focus on data right now. Firms that don’t will be way behind.

For firms not leveraging data or not having structured consistent data on their engagements – it will be a big first step to get some of the really powerful insights.

If you want to narrow down the definition of data to get started, start with the general ledger. The tools and technologies that are out there are very good with general ledger data. The sub ledgers are a little bit more complicated but start with the general ledger – there’s so much there.

A prediction for the future of accounting

Al predicts that the historical financial statement audit has a shelf life and will be confined to the history books at some point in time.

The first industry that is going to reduce its need for historical financial statement is banking. This is because there will be the emergence of online start-up banking companies that will start doing commercial lending without needing an audited financial statement. This will then cause the bigger banks to follow suit.

“I think that this is a huge challenge for a profession, so we need to be prepared to migrate from audit and accounting to assurance and advisory.”

Regulators might be slower to respond, but remember, the regulators still question the quality of audits as they sit today. The minute they start seeing that what they’re getting on assurance and advisory in real time is much more reliable and invaluable, they’ll jettison the historical financial statement in a heartbeat.

So much is possible for the future of the accounting profession, but it requires the right mindset from all firms from the outset to be effective. Conventional methods of audit do not yield the desired results when it comes to insights but by adapting big data, you can transform your methodologies, allowing for the analysis of structured data in real-time.

Watch the full video interview to take a deep dive into the conversation and get an insight into the thoughts of one of the leading names in accounting. If you think the time is right to implement a market-leading technology on your next audit or interested in seeing how Inflo could transform the way your firm works, get started for free today.