How to Overcome Challenges Facing the Future of Audit

By Terry Sheridan

Call it “future shock” for audit.

“Advances in technology and the massive proliferation of available information have created a new landscape for financial reporting,” Alan Anderson, CPA, founder of ACCOUNT-ability Plus LLC and executive director of the Rutgers AICPA Data Analytics Research Initiative, said in a prepared statement. “To successfully impact the future of audits, firms must understand the key challenges currently facing the audit profession so they can identify the needs that must be met by the audit of the future.”

According to the report, 4 Keys to the Future of Audit, “many firms do not realize their audits are living in the past.” Just because their audits are paperless doesn’t mean those firms are modernized and future-ready.

While audit delivery has changed, “nothing about the audit process itself has changed along with it – thus, the same systematic inefficiencies are still present,” the report states. “Furthermore, auditors continuously fail to use technology to better understand a client and their business, the industry, and as a tool to enhance curiosity.”

So, what are these challenges that face the future of audit? They can be grouped into four categories: quality, innovation, talent, and relevance.

Here are the key takeaways:

But, unfortunately, the traditional response to audit problems or issues is a peer review program. Trouble is, that involves an inspection after the work is already done. That means “the CPA profession’s past and present responses to quality assurance have been more reactive than proactive. Future quality efforts must be more proactive and more real-time,” the report states.

Developing a quality mindset in future auditors requires direction from knowledgeable instructors and firm leaders, as well as a “first time right” environment, which drives a “continuous culture of quality,” the report states.

2. Innovation. Innovation depends on insights, and the drivers to achieve that in today’s environment are big data and data analytics, the report states.

“Without transforming this data/information into insights to assess needs and wants, predict behaviors, and integrate it with knowledge beyond the financial statements, the audit is a meaningless exercise,” the report states.

Innovation means change, but change is never easily accepted, especially when it involves technology. But the profession must question its practices to drive change, to be innovative, and to remain relevant.

“Cloud-based audit solutions, continuous auditing, real-time risk/compliance monitoring, real-time practice monitoring, cognitive assisted decision-making, and robust data analysis are only a few of the innovations the profession must act upon now or become obsolete.”

3. Talent. There’s no question that accounting professionals are needed and in demand. But here’s the catch: More students than ever are majoring in accounting, but the gap between those who graduate with accounting degrees and those who become a licensed CPA is widening.

Thus, while the demand for CPAs is rising, the supply is declining, and there has been a shift from hiring staff accountants to individuals with greater analytical and business skills.

“The audit of the future requires deeper training in areas beyond an auditor’s historic skill sets,” the report states. “While, in some cases, the audit demands skills of other disciplines, such as risk management, forensics, and IT, the auditor of tomorrow increases his or her understanding of these nontraditional disciplines and works more closely than ever before with data and analytics specialists.”

4. Relevance. Here’s a mouthful: While the purpose of audits is for the audited entity to maintain financing or to meet regulatory requirements, that doesn’t necessarily equate to how they are relevant, the report states.

Relevance is crucial for client satisfaction and retention. While firms generally like to say their audits are unique and, therefore, more relevant, business owners “typically regard the annual audit as a cost or a necessary evil that is not relevant and adds little or no value to the business,” the report states.

That means firms must deal with how they are selected. And that’s generally by price.

“In this environment, words about relevance are of little meaning because the client is doubtful the audit will actually deliver on that promise,” the report states.

So, the bottom line is that firms must make their audit relevant by making it pertinent to a particular client.

“The audit team needs to know that the partner expects them to understand the client’s business and to add insight to the audit by identifying areas where the client can improve,” the report states. “Firm culture must emphasize the importance of understanding the client’s business and communicating and confirming this understanding to the client.”

Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. Reprinted with permission of AccountingWEB.