Fiona Czerniawska 11 Feb 2019 04:49pm

Biggest threat to audit may be tech, not regulation

Last year was a challenging one for audit firms, particularly here in the UK, culminating in the publication of the Kingman Review together with the Competition and Market Authority’s market study update and the launch of the Brydon Review into proposed reforms

Caption: One of the most powerful drivers of change may not come from legislation but rather from the forces of technology

But amidst all this regulatory pressure for change, research that we have launched today suggests that in fact one of the most powerful drivers of change may not come from legislation but rather from the forces of technology.

Our research across 150 senior executives in the UK and US (over half of whose companies are audited by the Big Four) found that a third are already breaking the audit process down into separate parts. In addition, nearly half (45%) say that this change will lead to more parts of audit work going to technology firms, and amongst finance function executives specifically, this proportion rises to 60%.

The key area where technology firms could find an entry point is in the automation of the data-gathering process through the use of robotic process automation (RPA). Audit firms are, of course, already investing in this themselves and building RPA and other technologies into their audits. But many executives (47%) feel that while their auditors are moving in the right direction, they need to do more. Moreover, 61% say that technology firms would do a better job of automation and 59% believe the IT giants could gather the necessary data more quickly and cheaply.

Audit firms should be worried about this. It won’t come as a surprise to them that clients are looking to leverage technology in their financial reporting and the audit process, but they may well be surprised that so many clients are already looking at breaking the process up into separate components and that so many favour the tech firms to do the work. Given all the money that audit firms are investing in new technology, this will be a concern.

There is, however, a clear leader amongst the Big Four in terms of perceived use of technology: Deloitte. When we asked executives which of the Big Four was best positioned to deliver the technology components of an audit, Deloitte secured 52% of the vote, far ahead of KPMG (22%), EY (18%), and PwC (8%).

The danger for audit firms is that the software developer giants such as SAP, Oracle, and Microsoft, and others such as Sage for mid-sized businesses, bring to market software applications that successfully automate the financial data-gathering process, with the necessary audit controls built in. This would mean that the data would no longer need to be further audited—taking a significant piece of work (and a significant portion of revenue) away from the auditor.

We may then see IT services firms such as IBM, Accenture, and others offering the ability to customise these applications for individual businesses and provide further value-adding enhancements.

Earlier research that we conducted found that executives believe they could be actively using such software in their businesses in the next five to 10 years. This threat to the audit firms is real, and it’s coming down the line pretty quickly.

A further knock-on threat to the audit firms is that the IT companies may push to recruit more qualified accountants and auditors into their businesses to help them develop the products, particularly with a view to ensuring the necessary audit controls are built in. As a result, audit firms could also have a growing battle for talent on their hands.

Further into the future, the development of AI could pose an even bigger threat. If technology begins to be able to generate insights into data and from there starts to develop an opinion, the whole role of the auditor could be challenged. This remains a more distant prospect, however.

So what should audit firms do about these gathering clouds? Their best defence in the first instance is surely to keep on investing in, and rapidly developing, their own RPA and other emerging technology applications, and ensuring that clients are aware of them and can see the tangible benefits. Perhaps part of the issue is successfully equipping audit engagement teams to be able to demonstrate this powerfully and confidently.

Whatever the case, the battle lines are beginning to form. Technology has the potential to transform the audit, and who the winners will be is sure to be fiercely contested.

Fiona Czerniawska is director of Source Global Research, the leading research and strategy firm for the global professional services industry