businesswoman brainstorming and planning at board in office

Long gone are the days when an auditor wandered around a warehouse with pencil and clipboard, recording inventories of raw materials and finished goods. Artificial intelligence has arrived both to tidy up once-tedious processes and expand what’s possible. (Photo by Getty Images)

Features | From Pivot Magazine

The future of audit  

In a time of massive pressures and big possibilities, there’s one thing we know for sure. Auditing is in the midst of a major evolution.

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It starts with the very way auditors do their jobs.

Long gone are the days when an auditor wandered around a warehouse with pencil and clipboard, recording inventories of raw materials and finished goods. Mobile apps not only compile the inventory numbers but also comb through stacks of documents, finding patterns and flaws in real time. Working papers—containing far more data than ever before—are being produced quickly and are instantly shared with members of an audit team. 

Artificial intelligence has arrived both to tidy up once-tedious processes and expand what’s possible—helping to find needles in haystacks, reducing the risk that mistakes or fraud will slip through the cracks. (It can even help find anomalies in leasing agreements and other legal contracts.) Machine learning is being used to develop probability models for auditors—including those that calculate the likelihood of material misstatements. 

But as always, new tools bring challenges of their own, not just uncertainty over what skills auditors need for the future, but also questions about what needs to be measured and audited in a world with an insatiable appetite for more data. Audits greatly depend on the quality of information made available to auditors, and on exercising care to avoid bias and undue reliance on the very data these tools generate.

Like any profession, accounting is in a constant push and pull between the established practices and everything that’s new. Nowhere is this more the case than in audit, where so much of what’s fundamental about the work is now under scrutiny. Technology is just one of the drivers of change.

Outside our borders, auditors are having to prove their credibility to an increasingly agitated public after a series of scandals. Allegations of auditor shortcomings have surfaced at, among others, the U.S. financial services giant Wells Fargo, at South Africa’s state-owned power utility Eskom, and at the U.K. construction group Carillion, which collapsed in January under the weight of $2.6 billion in debt. In some jurisdictions, calls for reform are growing louder. 

And there’s still more. Debate is raging over how to navigate an increasingly global landscape, how to address a widening “expectation gap” between auditors’ perceptions of what they can and should deliver, and what society at large has come to demand of them.

Here in Canada, we’re not merely watching all this unfold. Those involved in the audit process are considering how they might be affected by these developments. They’re raising essential questions: What is the purpose of the audit of the future? How should auditors be trained? And how can firm culture promote audit quality?

“They [investors] don’t seem to appreciate whether the information they’re using is audited or not,” says Sheila Fraser, FCPA and former auditor general of Canada. (Photo by Ron Bull/Getty Images)

Sheila Fraser, FCPA, Canada’s auditor general from 2001 to 2011, recalls a sobering moment this past June. At a discussion hosted by the International Financial Reporting Standards Foundation, she heard a panel member make a startling point—that analysts and investors place little reliance on audited financial statements anymore. Coming on top of similar comments she had heard in the past, Fraser says that the moment underlined what she considers the biggest long-term threat facing CPAs today. “The increasing lack of reliance on financial statements and on audited information is a very serious situation for the profession,” she says.

In the age of instant data, investors and analysts increasingly rely on non-GAAP and other measures to assess a company’s performance. In their quest for up-to-date information, they may inadvertently trust sources that can be of dubious accuracy, consistency or comparability or those that stray into hype, including news releases on a company’s latest acquisitions.  

“Investors are even looking at sales figures by tracking trucks leaving factories,” says Fraser. “They don’t seem to appreciate whether the information they’re using is audited or not. To me, coming from the world of audit, it’s all rather frightening.”

Equally unsettling, the very purpose of an audit has become a subject of perception. CEOs, investors, regulators, the media and shareholders all have differing interpretations these days of what they expect auditors to do. Management may consider an audit primarily a service provided for its own benefit. Others say it’s merely an evaluation of risk. The public can’t shake the perception that an audit is a form of indemnification—insurance that a company won’t go under.

How do we close the expectation gap between auditors’ perceptions of what they should deliver and what society has come to demand of them?

This expectation gap was bound to widen over time. What often gets less attention are the nuances that even critics of auditors acknowledge. The vast majority of audits are completed without incident. What’s more, the quality of an audit inevitably reflects the quality of the data supplied by a client. Outside auditors are just one of three teams essential for a high-quality audit. They cannot do their job properly without a competent and honest senior management, and an audit committee determined to exercise strong oversight. If one leg of the stool falters, even the most scrupulous audit is no guarantee that all is well in a business. 

When a company publishes misleading financial statements, “you have to peel the onion to see the actual cause,” says Kevin Dancey, FCPA, the Canadian CPA who recently became chief executive officer of the International Federation of Accountants (IFAC). “Is it management? Is it the wrong corporate culture in terms of governance? Or is it, indeed, a failure of the audit firm to apply the standards appropriately and do its proper work?”

For Dancey, the expectation gap is a major issue facing the profession today. “We can have the best assurance standards in the world, we can make sure that professional accountants are trained appropriately,” he says. “But if we’re not reporting on information that aligns to society’s values, then that becomes a problem for us and our relevance.”   

Scandal is almost always a catalyst for self-reflection and change. The Carillion saga, in particular, has triggered calls for wide-ranging reform in the U.K. There, a recent parliamentary inquiry resulted in a report calling for a “radically different approach” to auditing. The report also identified factors and findings beyond the audit. It pegged the failures of the company as “symptomatic of a market which works for the Big Four firms but fails the wider economy.” It further recommended that the statutory audit market be referred to Britain’s competition watchdog while considering a radical notion—that the Big Four firms be broken up to promote competition and lessen conflicts of interest.

Sheila Fraser is unequivocal: “The increasing lack of reliance on audited information is a very serious situation for the profession.” 

Two other thorny issues bubble to the surface with growing frequency. First, who should pay auditors for their work—by extension, who is the client? Closing the expectation gap will require a measure of agreement on whether auditors are working for management or investors, and who should pay their fees. Likewise, the financial crisis in 2008 raised questions on why the three big credit-rating agencies are paid by the companies whose securities they assess. That debate continues to this day.

Second, how far should firms be allowed to diversify beyond their core auditing business? Many in the profession argue that, in the case of complex global audits, an audit group benefits from access to a range of disciplines and services—areas in which the firms have valuable expertise. “Auditors exposed to non-audit services develop enhanced business experience for both industries and companies. This can lead to improved audit efficiencies and effectiveness,” according to the findings of a group of senior Canadian business leaders who came together in a 2012 initiative to enhance audit quality. 

On the other hand, Kin Lo, FCPA, accounting professor at the University of British Columbia’s Sauder School of Business, says auditors should avoid conflicts by turning down consulting work. “It seems that every time the profession, regulators and the public find that consulting work is an issue, the firms carve off a piece of that business, and then start building their consulting arms all over again,” Lo says. “The auditing function can’t be a smaller and smaller function of the firms, otherwise they’ll take their eye off the auditing ball. It goes beyond conflict of interest with a particular audit client. It’s a conflict of interest within the firms regarding what business they are in.”

It’s a measure of the respect Canada commands in the financial world—remember our banks during the 2008 crisis—that so many Canadians are playing such a prominent role in moving the profession, and auditing, forward. Brian Hunt, FCPA, who retired earlier this year as chief executive of the Canadian Public Accountability Board (CPAB), chairs the International Forum of Independent Audit Regulators, the Tokyo-based body that seeks to enhance the quality of audits around the world. Kevin Dancey speaks for about three million accountants in more than 135 countries as the head of IFAC. In addition, Canada is represented on the IFAC board, its committees and also on the Independent International Standard-Setting Boards. 

Still, the globalization of business presents its own dilemma. No country, especially an open economy such as Canada, can isolate itself from financial reporting practices in other parts of the world. In particular, reforms such as those that will likely come out of the Carillion case tend to travel across borders. Since many Canadian companies operate in a global environment, our audit structures and processes need to compare or align with practices internationally.

Michael IzzaMichael Izza foresees a bigger role for firms other than the Big Four, and more use of technology. (Photo by PIVOT Magazine) 

Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, told the BBC earlier this year: “As a profession, we have to be prepared to think and act differently in future.” Among other changes coming out of the Carillion affair, he foresees a bigger role for firms other than the Big Four, and more use of technology.

At the same time, domestic companies and investors will resist audit regulations and standards that have little relevance to them. That means finding a balance between standards and reporting practices that fit local conditions but also support the many Canadian businesses that trade and operate across borders. 

In practice, Canada has so far taken a tailored approach. For example, it has followed global assurance and reporting standards for listed companies, but gone its own way on reporting standards for private entities, enabling the latter to follow a simpler process in preparing financial statements, including disclosure requirements.  

In Canada, a collaborative approach has helped overcome some key hurdles. Thus, the profession, regulators and financial institutions worked together to set up CPAB in 2003 in the wake of the Enron scandal.   

“We’re challenging everyone in the financial reporting process to buy into the process,” says Linda Mezon. That’s key to raising “the quality bar.”

CPAB regularly reviews the work of 14 firms that audit more than 100 public companies. It also inspected files at 31 smaller firms in 2017. Most of CPAB’s nine directors have never worked for an auditing firm, giving them a measure of independence unusual for such professional oversight bodies. CPAB requires firms to correct deficiencies in ways that are both effective and sustainable. If a firm fails to improve, the board has the authority to impose various penalties, from publicly naming a firm to restricting it from auditing public companies. The board says that it takes various measures to improve audit quality and investor protection. For example, it encourages auditors to compete on the quality of their work, rather than who charges the lowest fees. It is working with securities regulators to gain access to working papers of audits performed outside Canada. It broadened its work this year to review not only individual audit files, but also the effectiveness of the Big Four firms’ structures, their accountability, quality control processes and corporate cultures. 

CPAB has not been shy: Its latest inspection report, issued this October and covering the work of the Big Four firms, noted “inconsistent audit quality.” Two of the Big Four, which the report does not identify, saw an increase in “significant findings” or problem areas. CPAB has told one firm to review its inspection findings to determine if the latest results are an anomaly or an early indicator of deeper problems. The other firm must provide a detailed remedial plan “to address these unacceptable results.” 

“As we examine these inspection findings, we are continuing to see inconsistent audit quality,” says CPAB chief executive Carol Paradine, CPA. “While the overall state of public company auditing in this country is strong, this prolonged inconsistency is something we are focused on requiring the firms to resolve.” 

In response to the turmoil generated by the 2008 financial crisis, CPAB and CPA Canada began work in 2012 on a far-reaching project to enhance audit quality. Their work covered three main areas: the role of audit committees in overseeing external auditors, the auditor reporting model, and auditors’ independence. Their report, published in 2013, has ushered in significant reforms. Audit committees of public companies must now conduct a full review of their audit firm at least every five years, and publish a summary of their findings. CPAB also recently completed a two-year pilot project designed to give audit committees specific yardsticks to evaluate the quality of an external audit.  

Post the collapse of Carillion in January, a parliamentary inquiry resulted in a report calling for a “radically different approach” to auditing. (Photo by Joe Giddens/Getty Images) 

Meanwhile, the profession is coming to grips with the complaint that traditional financial statements are losing their usefulness as analysts and others turn to a variety of other measurements of corporate performance. CPA Canada has developed guidance to help audit committees address some aspects of this emerging issue. Key Performance Indicators: Tool for Audit Committees (download at cpacanada.ca/KPItool) focuses on developing a process to present reliable metrics in an issuer’s Management’s Discussion and Analysis and earnings news releases. 

Furthermore, Canada’s Accounting Standards Board issued a draft framework for reporting performance measures in June, and opened it for public comment. The paper covers public companies and other entities subject to outside scrutiny, such as non-profits that need to submit information for funding grants, or private companies seeking capital from outside investors. The board describes the draft as “just the first step” in bridging the gap between what companies report and the consistency, comparability and transparency investors want. 

“We want to stress that quality of information needs to be considered when people decide what they’re relying on to make an investment decision,” says Linda Mezon, FCPA, the board’s chair, citing the example of a retailer that measures sales per square foot—a common yardstick of performance among brick-and-mortar stores. In the interest of transparency and comparability, the company ought to disclose whether the measure includes or excludes online sales. 

“We’re challenging everyone in the financial reporting process to buy into the process,” Mezon adds. “If everybody is paying attention, then we hope to raise the quality bar with regard to the information that people are getting.”

The auditors of tomorrow will need to feel at home with the tools now reshaping the profession.

When Anton Colella, CEO of Moore Stephens International and former head of the Institute of Chartered Accountants of Scotland, landed at Toronto’s Pearson Airport earlier this year, the customs agent asked what had brought him to Canada. Colella explained that he had come to address a meeting of accountancy leaders. The agent’s response: “That’s really riveting.” 

As Colella’s experience shows, auditors and accountants are still struggling to shake off their image as stick-in-the-mud number-crunchers. Of course, reconciling a set of books remains an essential skill. But much more is expected from auditors than in generations past. Increasingly, they will need to show a willingness to embrace change, an ability to persuade their colleagues to do the same, and to master messaging, strategic thought and leadership. “It’s not about friendliness,” Colella stresses, “it’s about the ability to communicate. I’ve watched really smart people in the profession make sense of data but be absolutely useless at articulating it to the client.”

The auditors of tomorrow will need to feel at home with the tools now reshaping the profession, from emerging technologies to revamped education and training. The benefits as well as the threats posed by this transformation are at the heart of CPA Canada’s new Foresight project (see below).  

“The traditional path that I took was a B.Comm degree at university and going into an accounting firm,” says Eric Turner, CPA, a director at CPA Canada. “Firms are now finding that they need more people with math degrees and data analysis strengths, and to understand what the coding is telling us.” In a sign of the times, UBC’s Sauder School is among a number of schools that have begun offering master’s degrees in business analytics, and similar courses for undergraduates.

Individual firms around the world are working more closely with schools and universities to turn out graduates with the skills needed for auditing in the digital age. Cutting-edge disciplines such as artificial intelligence could help persuade a new generation that auditing is a much cooler calling than their parents may have led them to believe. As Turner sees it, “it can bring people who perhaps were not likely to come down the audit path to think: ‘Well I like that it still involves crit  thinking to gather evidence. It’s about searching for things using technology.’ ”

New processes and standards will demand new structures and leaders. Amid the transformation, one constant will remain: Businesses will need to communicate accurate information to their stakeholders. To do so, they will need trusted outsiders to verify that information. In other words, they will always need auditors.

Foresight: Reimagining the profession

The tough decisions facing the profession are encapsulated in an ambitious new project at CPA Canada called Foresight, which will study—and provide a roadmap to navigate—the evolving impact of new technologies, social and geopolitical issues, changing regulatory processes and the need for trust and ethics in a digital world. These drivers of change will impact CPAs in all areas of practice including audit and assurance, tax, performance management and financial reporting. “This process draws on all elements of the accounting ecosystem,” says CPA Canada president and CEO Joy Thomas. Much of the input will come from a series of roundtables, each attended by about 40 business and accounting leaders. CPA Canada is also creating online forums and discussion groups for its 210,000 members and anyone else who may be interested, in or outside Canada.

Find out more at cpacanada.ca/foresight