future audits will yield far more information much faster.
by alan anderson, cpa
transforming audit for the future
some cpas say that auditors can’t provide any kind of advice without harming our independence and violating our professional ethics. but remember, the pillars of our ethics as cpas are objectivity and integrity. independence is the measure chosen by our profession to measure our objectivity.
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if we remind ourselves of those pillars and make our decisions from that viewpoint, we’ll be fine. you can offer advice and options for a client, but they must be the ones who make the management decisions. the decision-makers at the client must be the ones who choose an option and who implement that option. we can’t choose and we can’t implement.
to practice integrity and objectivity, you also need to be willing to push back when a client asks you to overlook something in exchange for a consulting engagement. if you think that maybe you crossed the line of our ethics standards, then you probably did.
don’t be scared of the standards but use them as a guide to help you know when you need to step back. be willing at all times to step back and evaluate whether you are too involved. good clients will respect you more when you’re willing to push back and adhere to your professional judgment.
evolve or disappear
if you don’t evolve, then your business will erode. for the profession’s sustainability, if you don’t evolve to provide what clients want, they won’t need you anymore. your services won’t be relevant to what they want and need.
this shift is inevitable when you build ethical attributes into the core fabric of your culture. but you won’t get to that end state without a plan or monitoring your progression along that spectrum.
moving along this line from audit and accounting to assurance and advisory will mean our firms will look different. we’ll need other skills. today, new auditors learn to be auditors by spending hours ticking, tying and tracking invoices. but much of that will be done in the future through automation, so we’ll need to teach those new auditors more critical thinking and interpretive skills. while the bots and ai can do the ticking and tying and will easily kick out the outliers, we’ll still need humans to interpret whether those outliers make sense.
future audits will change.
we’re on the cusp of a technological change in what will be audited. while we’re still auditing historical financial statements, those are of decreasingly less utility to our clients. technology means that the data flowing from transactions to accounting systems is happening faster and faster. business owners rely on updated information so they can make decisions in real time. what use is an audit report that’s months out of date?
in the future, auditors will be performing audits of information flow. here’s an example of how that’s happening today. schwan’s sells frozen foods that are delivered to homes by route drivers. these route drivers are paid by commission, so their pay must cover their gas and other driving expenses. when the company put gps units on the delivery trucks, they could see exactly where their drivers were and how many stops they had to make. a driver in minneapolis might be able to hit 25 homes in just two miles of their route, but a driver in upstate minnesota can’t. they might have to drive 30 or 40 miles to do that.
so, to keep it equitable and to keep their drivers engaged in the business, they adjust their commission structure based on the kind of route a driver has. an auditor would see how schwan’s managed their business off those information flows and determine if those financial transactions made sense.
future reporting will change
neither the users nor the stakeholders get what they need out of an audit. detailed research by baruch lev and feng gu indicates that the usefulness of reported financials to investors has declined significantly over the years. as more investors and stakeholders request information on non-financial metrics, especially in the areas of environmental, social and governance (esg), even the sec is stepping up efforts to make sure that what’s reported in company disclosures is accurate.[i]
the reporting framework has not kept pace with the users’ needs, especially in the modern era, when much of the value of tech companies and pharmaceutical companies is contained in the intangible assets they create. when i was at the aicpa, i worked with the enhanced business reporting initiative to develop a more meaningful reporting framework. sadly, that initiative didn’t really go anywhere.
lev and gu also propose a new framework highlighting a company’s efforts to create, develop and preserve its intangible assets. tech companies that use the saas (software as a service) model have developed their own kpis and metrics since gaap metrics are relatively meaningless for them. these metrics and a reporting framework for saas companies built around those metrics are described in the book subscribed, by tien zuo, the founder of zuora.
auditors who embrace these changes and move along the continuum of a&a to assurance and advisory will have a brilliant future. i’m optimistic about the future because i know many out there want to push for these changes.