How the pandemic has transformed the way auditors work
In response to physical-distancing requirements, auditors have developed new ways of conducting quarterly reviews and annual audits (iStock)
In early April, Michael Paterson’s audit team watched and listened as a member of their client’s staff led a walk-through of a warehouse stocked with goods. But this wasn’t a garden-variety inventory count. Instead of following the inventory manager up and down the aisles on foot, the PwC auditors—Paterson is the firm’s national assurance leader for Canada and Asia Pacific Americas assurance leader—were in their home offices, tuning in remotely to a FaceTime video feed of the warehouse shelves from the employee’s iPhone. “It was like watching an audit live,” says Paterson.
As with so many sectors, auditing has been significantly disrupted by the COVID-19 outbreak. “All of this happened so quickly,” says Jean-François Trépanier, partner and national director of professional standards for Raymond Chabot Grant Thornton in Montreal. “On Monday, we were all in the office. By Friday, we were all working remotely.”
While the constraints of the pandemic have caused countless headaches for these CPAs, Paterson says they have also “forced innovation.” In response to physical-distancing requirements, auditors have developed new ways of conducting the quarterly reviews and annual audits that shareholders, lenders and capital markets depend on to make investment decisions. “Remote audits have been done before, but not on this scale,” says Rosemary McGuire, director of external reporting and capital markets at CPA Canada.
For Paterson and many other auditors, life since mid-March—when governments across Canada, in consultation with health officials, declared states of emergency and began paring back the economy to essential services—has been a high-speed reality check on the preparedness of both client firms and their own. “From a risk assessment perspective, it is a bit of a wake-up call,” says Trépanier. “Some entities did not foresee this happening.” The crisis has also provided a crucial test for the cloud-based data-extraction audit systems that many large firms have been creating in recent years. “That whole virtual connection is there,” says KPMG Canada audit partner Kevin Kolliniatis. “It’s been a seamless transition for many of our clients.”
Still, the disruption has forced auditors and regulators to develop workarounds while maintaining established standards and delivering reliable assurance to the markets. “The real positive is that it is forcing people to think differently,” Paterson observes. “Things won’t be exactly the same as before, but no one wants this to be the new normal.”
IFAC and other international bodies are providing guidance for auditors in light of COVID-19
Early in Canada’s period of emergency measures, federal and provincial securities regulators decided to allow issuers to take extra time to release their year-ends and first-quarter statements. (Few firms have taken advantage of the extension.) By late March, the Canadian Public Accountability Board (CPAB) also released guidance for auditors on topics like going concern evaluations, inventory counts and the implications of conducting audits from remote locations. In particular, regulators recognized that they’d need to make allowances for the fact that the early innings of the forced slowdown occurred at the very end of, and immediately following, what is for many the fiscal year-end in March, with crucial announcements about stimulus and business restrictions occurring in early April.
These moves dovetailed with similar policy and practice announcements from international bodies, such as the International Federation of Accountants (IFAC), which has provided FAQs and guidance on assessing pandemic-related events that occurred after the end of a reporting period but before financial statements were made public.
Because the first tranche of tough measures came in March, when many auditors were preparing for year-end audits, “the inventory count got raised right away,” says Canadian Public Accountability Board chief executive Carol Paradine, whose organization has been in frequent contact with regulators, the leading audit firms and CPA Canada.
In some cases, Paterson says, auditors have allowed for deferred or rolled-back inventory counts. They are also developing new controls to ensure that remote inventory counts are reliable; counts must be streamed live rather than recorded, for example, since recorded video can be doctored. Even if clients’ inventory managers are amenable to video audits, however, warehouses without WiFi connectivity can limit what’s possible.
Some observers warn that, when working remotely, auditors may miss the important non-verbal or incidental clues that they typically gather when meeting a client’s management team in person. “Remote auditing has long been a challenging topic for the profession because of the belief that auditors may be more likely to discover fraud, malfeasance or simple mistakes when they visit a site,” noted a recent article in the Journal of Accountancy. “The worried look on a hurried senior manager’s face, the use of antiquated technology and the unmistakable vibe of a toxic culture all may be cues that something is amiss that might be more easily observable during a site visit.” As Paterson adds of the now-constant video conferences, “People need to learn how to read the room virtually.”
Kaylynn Pippo, CPA Canada’s principal for audit and assurance in research, guidance and support, adds that remote auditing raises a range of potential issues. There may be challenges in obtaining evidence from sources used in previous audits and making sure information received electronically is reliable and timely. Pippo adds that changes may be needed to the audit strategy, including team composition and supervision. And remote work may be especially challenging for junior audit staff, who are accustomed to more hands-on oversight.
While on-site visits will resume after restrictions lift, other changes are here to stay. Some aspects of audit committee meetings, for example, may permanently migrate online. With large or global firms, virtual audit committee meetings are already commonplace, but they may well become the standard in certain circumstances, reducing travel demands on auditors. “We can be quite effective working remotely,” says Sonya Fraser, EY’s Canadian audit leader.
Distancing requirements have proved most challenging for some smaller firms that weren’t as far along the “digital journey,” Kolliniatis notes diplomatically. He says his firm’s consulting service, KPMG Lighthouse, has been working with these kinds of firms to expedite the transition from paper-based record-keeping to cloud-based enterprise resource planning platforms. Some SMEs have welcomed the change, but others have struggled to get up to speed. “We’re there to basically handhold and get them on a platform so they can collaborate,” he observes. “In some cases, the feedback was, ‘Wow, we can’t believe how quickly we could transform.’”
Trépanier points out that, in Montreal, Raymond Chabot Grant Thornton’s auditors have accelerated their use of technology, including confirmation platforms that allow auditors to get client customers, suppliers or bankers to electronically confirm the status of accounts or balances—a process that had been “very paper-based” for years, he says. “Teams are realizing this is a much more efficient process.”
The pandemic will accelerate firms’ and clients’ adoption of artificial intelligence and machine learning algorithms
Apart from the logistical and technological obstacles posed by COVID-19, auditors and regulators are also paying close attention to the way that widespread economic disruption is impacting their clients’ operations and viability. These dramatic changes affect everything, including the notes to interim financial statements as well as crucial going concern and capital asset impairment evaluations.
Paradine and others say that auditors preparing going concern assessments are relying heavily on scenario-based forecasts and stress tests to disclose material uncertainties, which helps businesses present investors, shareholders and regulators with a range of possible outcomes. While the business impact of the pandemic is far-reaching, she points out that auditors and regulators are pushing firms to be highly specific about how the pandemic has affected cash flows and cash burn rates instead of filling the notes to audited financial statements with general cautions.
Some auditors have been relying more heavily on in-house actuaries and other advisers through this period. “I’ve got my valuation experts on speed dial,” says Elliot Marer, KPMG’s national and Greater Toronto Area accounting advisory leader. Some clients, he says, have argued that it’s impossible to forecast in the current environment. But, Marer notes, “We’re really pushing back and going to experts.”
Still, many clients are glad to receive additional insights from auditors. “Our clients are more thirsty for that information-sharing than ever before,” EY’s Fraser says. She and others also stress that many clients have tried to internalize lessons about the flaws in their business models or operations that have surfaced during the crisis. “It’s actually really inspirational to see how clients are thinking differently about their businesses.”
Kolliniatis believes the pandemic will accelerate firms’ and clients’ adoption of artificial intelligence and machine learning algorithms, largely because events are moving so quickly that the demand for real-time insights has intensified. “The nirvana of continuous auditing is a notion that’s been around for a while, but the pandemic is expediting that need.”
Paterson sees positives in the pandemic, too, citing the accelerated investment in technology and the role that audit firms, and their consulting arms, are playing in advising clients on navigating the transition. “What we do is becoming even more important.”
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