The Future of Audit

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Pre-pandemic, the auditing profession had invested significant resources over many years to redefine the profession.  COVID-19 took the “future of audit” off the front pages, and it may have dulled the momentum at most firms.  But the underlying trends driving the imperative to re-imagine auditing have not changed.  After diverting resources to deal with the immediate problems caused by COVID-19, firms are once again moving forward with the deployment of new technology, upskilling their professionals, and taking other measures necessary to build a solid foundation for the future.

The Audit Business

To understand how current trends will impact the future of, it is helpful to summarize the core elements of the delivery of the audit business.

  • Technical  Auditing is a process of risk assessment and response.  It is a thinking person’s game that requires the auditor to
    • Gather and analyze information
    • Make decisions and judgments about their analysis, including the linking the audit approach to a thorough and careful assessment of audit risk.
    • Form evidence-based conclusions and communicate those conclusions and their rationale to others
  • Economic  The market for audit services sets the price, and there is little an audit firm can do to raise its fees beyond what the market will bear.  Instead, firms focus on improving efficiency of service delivery.  The mechanics of the audit process, which include the use of technology, certainly play a role in determining audit efficiency.  But the execution of the audit service, irrespective of the technology, also impacts efficiency.  People perform audits, and how those people are managed, coordinated and directed toward a common purpose is a significant determinant of engagement profitability.
  • Client service  The client experience is a balancing act between the auditor’s professional responsibilities under GAAS and the business imperative to “partner” with clients and provide value that extends beyond the delivery of the financial statements.  Growing this value proposition requires auditors to identify and assess client needs and use their creative problem skills to address those needs.

Trends Driving the Future of Auditing

Our research combined with extensive discussions with audit firms has led us to focus on the following trends as being the most impactful drivers of the future of auditing.

  • Remote workforce  Most firms expect that a significant portion of their staff and clients will continue to work remotely even after it becomes possible to return to work.
  • Changing client needs.  Clients face a rapidly changing business environment, and in order to compete, they are changing their business models.  As clients grow and their business models become more complex, they will expect auditors to provide insight, not just compliance.
  • Data analytics, AI and other technologies.  Business, government and not-for-profit organizations are pushing to incorporate data analytics into their business models and so is the accounting profession.  The data analytics movement is still in its early stages—most organizations and industries are still trying to “figure it out.”  Larger organizations have seen success in deploying data analytics; the biggest barriers preventing the next tier of organizations from successful deployment is a lack of expertise—there aren’t enough data scientists to go around.
  • The need for specialists and the emergence of shared services for delivering audits.  The auditing profession has been trending toward using specialists for many years.  This trend will continue, possibly at a quicker pace in response to the increasing complexity of client business models.  Deploying audit teams that supplement the core team with specialists (technology, business valuation, etc), internal shared services (data extraction) and the off-shore execution of selected audit procedures will create project management challenges.

Required Competencies of the Future Auditor

To be successful in the future, auditors must have highly developed foundational skills in addition to being technically competent.

Technical Competencies

The core technical competencies of auditing include professional skepticism, analysis, judgment, and a working knowledge of the relevant auditing and accounting standards.  In the future, standards will change, but these core technical competencies will not.

The mastery of complex accounting standards such as stock based compensation or derivatives typically resides with a small number of the firm’s most senior auditors.  In the future, as accounting standards become even more complex, this trend will only continue.

Therefore, at the staff level, the skills relating to complex accounting standard will focus on the ability to:

  • Identify accounting issues early in a variety of circumstances
  • Gather information necessary to determine the proper accounting
  • Triage the relevant issues and communicate effectively with the in-house expert
  • Manage the stakeholders to reach an appropriate conclusion

Foundational Skills

Client expectations and the demands of the competitive environment will push auditors to provide more insight and become more consultative in the delivery of audit services.  To meet these expectations, auditors must have highly developed foundational skills that include the following.

    • Critical thinking and judgment  Auditors must have the ability to make evidence-based judgments .  They must be able to define the criteria that will determine the basis of their judgments and identify the information needed.  They should be able to identify and choose reasonable assumptions.  As the complexity of the audit increases, auditors must be able to evaluate the reliability and relevance of information outside their area of expertise.
    • Problem solving  If auditors are to provide higher value advice and insight, they must develop their problem solving skills.  At the core of this skill is resisting the tendency to rush to a solution before fully understanding the root cause of problems.  Learning how to frame and reframe problems will lead to the design of innovative solutions.
    • Data literacy  The application of data analytics will involve using new technology tools, but a firm’s ability to successfully incorporate data analytics into its practice will NOT lie in having its auditors master these technologies and data science techniques.  A firm’s first priorities should be to improve the analytical skills that are at the core of these techniques and that allow the auditor to solve problems using data analysis.
    • Project management  Anticipating an increase in the use specialists and internal shared services, all auditors must become skilled at directing, managing and evaluating the work product of individuals who are not under their direct supervision.  The ability to effectively supervise and manage remote teams will be of paramount importance.
    • Communication  Communication is a prerequisite and force multiplier for all other skills.  Without firmwide communication skills, an audit firm will find it difficult to position itself as a partner to its clients.

Conclusion

There is no doubt that technology and changes in the audit marketplace have moved audit firms to rethink how they deliver audit services and manage their audit practice.  The profession’s understanding of the “audit of the future” remains incomplete and somewhat abstract, but over time firm leaders will develop a clearer picture.

The development of new skills and competencies must be an integral component of shaping the audit firm of the future.  Firms should be prepared to rethink not only what skills they need in their staff but whether their existing training methods are sufficient to develop those skills.

The COVID pandemic diverted the attention of the profession away from future to focus on the very real short term crisis.  Dealing with this crisis has forced firm leaders to take a long, hard look at their business model and to challenge long-standing practices.  Ironically, dealing with COVID may end up creating a new urgency for the profession to define its future.

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