Features | From Pivot Magazine

Mind the gap

Technological advances are driving a shift in what is expected from auditors. For CPAs, that presents a challenge—and an opportunity.

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Two business partners analyzing financial reports on paper in front of laptopThe discussion is no longer about changing the public’s expectations. It’s about what auditors can do to meet them.(Shutterstock/Indypendenz)

For many years, auditors had to contend with the “expectation gap,” the space between what investors, financial journalists and other users expected from audited financial statements, and what those statements could actually provide. Some in the profession felt that the only way to close that gap was to educate the general public about what audits are and what they are not.

The advent of emerging technologies—such as blockchain and artificial intelligence-based systems that aggregate results by scrutinizing all transactions—changes the discussion about how to close the gap. It’s no longer about audit’s technical limitations or changing public expectations of what auditors can provide to capital markets. Increasingly, we are talking about what auditors can do to meet those expectations.

Take the example of Andrew Morgan, an assurance partner at EY who is embracing technological change in ways that extend well beyond tracking digital transactions. Morgan recently used a drone to assist with an inventory count at a corporate vehicle lot. He is just one of the professional accountants across the globe who are pioneering the use of drones in audit: Argentinian tax inspectors have used them to search for unregistered properties, and American auditors have deployed them to scan inventory on warehouse shelves. The result is often faster, less expensive and more accurate than traditional methods.

In 2017-18, CPA Canada hosted two symposia on the future of audit, posing questions about the scope, benefits and costs of new audit technologies such as these. Then, earlier this year, we convened a panel of experts to focus on leveraging these insights to begin closing that expectation gap for good.

portrait of CPA Canada's CEO and president, Joy ThomasJoy Thomas, CPA Canada’s president and CEO (Matt Barnes)

This shift in thinking, of course, doesn’t just reflect technological change or Canadian conditions. Within the past year, a number of major reports have analyzed audit failures in the U.K., each of them informing a far-reaching global debate about what the future may hold for financial reporting. In December 2018, Sir John Kingman’s independent evaluation of the U.K.’s Financial Reporting Council yielded 83 recommendations, including one on the establishment of a new regulator.

Then, this past April, the Competition and Markets Authority released the final report of its statutory audit services market study, which included another set of recommendations meant to remedy the lack of competition in the U.K.’s audit sector. Among them: separating audit from consulting services, as well as mandating joint audits to enable firms outside the Big Four to develop the capacity required to review leading British firms.

Finally, in recent months, the U.K. government asked Sir Donald Brydon to look into the future of audit and the matter of closing that expectation gap. Individually, and collectively with the Global Accounting Alliance, CPA Canada has submitted briefs to Sir Donald’s review outlining our own thinking about the topic.

The policy fixes recommended in these reports apply specifically to the U.K.’s audit community. But the profession at large will need to confront the same forces: social expectations, innovative technology and the political trends driving regulation. We know these will be tough challenges, yet they are also opportunities to make necessary changes. The discussions we are having now are the right ones to ensure that the profession maintains its leadership role in sustaining efficient, healthy capital markets.