By Russ Banham
According to a global survey of business leaders conducted by KPMG and Forbes Insights, nearly all executives (98%) say their external audit firm uses advanced technology extensively.
There’s little doubt that technology is transforming the audit, with tech solutions giving auditors “more insight than they ever thought possible,” according to Christian Peo, National Managing Partner, Audit Quality and Professional Practice, KPMG LLP.
As discussed in a recent article with Lou Trebino, Chief Technology Officer, KPMG LLP, about how technology is modernizing the audit to provide insights, the overall topic of advanced technology is a big umbrella. When it comes to improving audit quality, for example, precisely which tech is making a difference? What exactly can auditors expect in that regard from the broad range of solutions available today?
The following three areas can help answer those questions and reveal where technology can have a significant positive impact on audit quality.
1. Analyzing Entire Data Sets And Spotting Anomalies Sooner
By using bots trained to execute rules-based business processes and identify data anomalies, auditors can identify deviations across an entire population of transactions—not just a representative sample.
“If a company has millions of revenue transactions … the audit team is supposed to go in and decide how risky the population is,” Peo explains. “Until recently, unless you went and looked at every transaction, you had to make some generalizations about that population.”
With automated processes, it’s now possible to examine every transaction against predetermined criteria and flag outliers for human review.
Consider the transactions that occur in the traditional order-to-cash process. If a manufacturer purchases a significantly higher volume of raw materials from a specific supplier in a particular region than the historical data demonstrates is typical, automated routines can draw attention to the transaction, pegging it as higher risk and requiring further analysis.
“It tells you, ‘Here are some potentially risky transactions,’” says Peo. “Then the auditor can go in to investigate. They may find actual issues that need following up and act accordingly, or they could realize that maybe they seemed riskier, but all the evidence is actually appropriate—and that is just the way that a certain type of transaction may be recorded for this company.”
If this is the case—everything is appropriate as recorded—and the transaction was indeed business as usual, the bot can incorporate this new evidence and update its criteria. Subsequent analyses then become more accurate based upon those findings.
2. Improving A Company’s Own Internal Controls
It may be a given that auditors are using advanced technology, but many of these tools—artificial intelligence (AI) and data visualization, for instance—are also finding their way to companies themselves. In terms of which specific technologies will “dramatically transform” the audit, the Future-Proofed study conducted by KPMG and Forbes Insights found that most executives have their eyes on AI (61%) and smart analytics (50%). Robotic process automation was also expected by many to play an important role by many (48%).
“Companies have to keep up with us, at least to some degree, and can’t wholly rely on us to give them the insights,” Peo says. “They need to see how we are using technology, build technology into their finance internal controls and start to think about those same types of things.”
Benefits to the client soon become clear. By maintaining a modern tech stack that’s on par with their auditor, clients can communicate with their auditors more clearly, quickly and accurately during the audit process. They also have more control over their internal analysis. After all, “you don’t want your auditor to know more information than your SOX team or your internal auditor or manager,” Peo says.
The Future-Proofed study likewise noted that “most executives are confident in their own finance function’s current and planned technology, but most (58%) also readily admit that their external auditors are adopting technology more rapidly.” Clients may be hesitant to change their internal controls, and this is understandable—particularly when management believes they’re already in a good spot.
But, Peo cautions, “if a company’s technology is too far behind ours, that has the potential to increase risk from an internal controls perspective. … There’s a greater threat that the auditors find problems before management does, which could lead to the possibility of a significant deficiency or even a material weakness.”
3. Freeing Up Auditors To Do More Meaningful Work
As finance technology continues to evolve, most executives understand the need and are eager for the efficiencies that have ramped up their adoption of automation technology. As referenced in the Future Proofed study, “[Executives] expect this technology to deliver more accurate and reliable data; drive deeper insights into their businesses; detect heightened risk factors; and help their finance functions identify data outliers and anomalies—ideally, in real time.” Additionally, “The top-ranked benefits they’re expecting their external auditor’s technology to deliver are deeper insights into areas of heightened risk and control weaknesses (90%) and benchmarking of KPIs across processes, business units and industry peers (86%).”
Peo has seen this firsthand, noting, “Automation provides the opportunity to focus our work on transactions that are truly riskier, helping to flag markers and identify risk. Data and analytics help you understand transactions you’re supposed to be auditing. By looking at those transactions in multiple ways, you have a better sense of what you’re testing, where risk lies and how much risk is present.”
This, most agree, enhances the quality of their audit (98%) by delivering deeper insights into areas of heightened risk, providing better benchmarking against KPIs and increasing data coverage. The majority of executives also believe technology enhances the client experience (94%).
In addition, when a company has more advanced systems, they are more likely to be able to take advantage of their auditor’s own more advanced technologies. It’s a symbiotic relationship in that regard. For example, an auditor is more able to extract full data sets from a company if the company has a streamlined ERP system; that data extraction can introduce significant efficiencies into the process (in addition to the increased quality that comes with analyzing full data sets instead of representative samples).
“Our ability as auditors to use technology can be significantly constrained when there is not an effective system of quality management at the company [being audited],” Peo explains. “Having that effective system, particularly around financial reporting, is very important not only to get the insights, but also to make them useful.”
As audit technology becomes more powerful and intelligent, the human touch will always be vital because, according to the Future Proofed study, aside from fundamental accounting and finance skills, most executives believe financial reporting staff must bring skills of their own.
What Job Skills Are Most Valued By Leaders Of Financial Reporting Teams?
80% Critical thinking, reasoning and problem-solving
66% Investigative financial skills
66% Ability to develop data analytics to achieve specific objectives
57% Instinct for business strategy and strategic insights
“Those people who are intellectually curious and are able to draw insights from disparate data pools are going to be truly exceptional,” says Scott Flynn, Vice Chair, Audit, KPMG LLP.
How Can Advanced Tech Improve Your Audit?
Ultimately, technology is a powerful enabler that can help auditors improve accuracy, completeness and overall audit quality. It’s also possible for clients to use these same technologies to improve their own processes.
Whether it’s AI, machine learning, data visualization or any number of other advanced technologies, the most important factor is how the process or technology, along with auditors skilled in such advanced technologies, critical thinking and analysis, can demonstrably improve audit quality for stakeholders and the broader capital markets.
Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.