AccountsIQ – Auditors: Adaptation or Extinction

Auditors: Adaptation or Extinction

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Auditors: Adaptation or Extinction

One of the common misconceptions of Darwin’s ‘Theory of Evolution’ is the summation of the theory as being “survival of the fittest” whereas Darwin actually concluded that it is species that fail to “adapt and change” to evolving environments that become extinct.

This is a very appropriate reflection for auditors today, with a changing environment being forced upon the market from technological and regulatory evolution – giving auditors a very real choice between recognising the challenges and ignoring them. Those who adapt will prosper at the expense of those who don’t….?

There are two factors affecting the audit industry today:

  1. Regulatory changes: regulations imposed on the audit industry are becoming greater and are increasing competition. The requirement for larger organisations to 10 yearly tender for auditors has already seen several large names switch auditors despite long-standing relationships with their previous firms. This is a trend that will only increase exponentially and will inevitably move down the scale of company size.  At the other end of the scale the thresholds for Audit exemption are creeping ever higher and consequently the available market is shrinking.
  1. Technological changes: recent reports (referenced below) highlight the changes facing the auditing industry from technological advancements including Cloud Computing and Big Data Analysis techniques and how the auditor of the future will need to be both an accountant and an IT professional.

Regulatory changes are something that have a fixed timetable for implementation and must be executed by every practicing auditor.  We can therefore infer that Auditors are forced to accept and adapt to this change. Technological changes, on the other hand, are not compulsory and will be implemented at varying degrees to varying timetables by varying auditing practices, and herein lies the risk for those that move more slowly or not at all.

Recent news of large accountancy practices winning and losing long standing audit contracts only highlights the affect the changing regulatory environment can have for those within the industry. Those that view the “glass half full” are already implementing strategies to increase their competitiveness within the industry and win market share.

But what are the technological changes that auditors should be considering?

Firstly, let’s get rid of the myth: Computers are NOT going to take over the role of the auditor (at least not in the foreseeable future! I have to add that caveat due to a phenomenon called “Black Swan Theory” – which is a whole different subject!). Computers, and more importantly data analytical models, will have an increasing role to play in the auditing process. The old, and soon to be redundant, model of analysing a subset of data as a reflection of all transactions will exist no longer and instead large data analytical models will be able to quickly, easily and efficiently sift through each and every transaction and extract “outlying” transactions that do not fit in with certain criteria. These criteria and the subsequent transactions highlighted by the data analysis will still require an auditor to set, review and analyse – and hence the auditor will still have a very important role to play (and indeed will still control the entire process).

Some may feel that this is a vision of the future and that the auditing process will slowly adapt to this advancement in technology. Wrong. The auditing industry is way behind the curve on this one.

Cloud technology, a very real technological advancement, means that data has become available for analysis as auditors can access a company’s transactional database in real-time from anywhere in the world and at any time of the year. Database queries and data analytical models to extract outlying transactions are very much a reality. In fact, the only missing piece of the puzzle appears to be the fact that the auditing industry has failed to put two and two together. Or have they? The big 4 auditors are already catching on to this market failure as they implement several strategies to avoid decline:

  1. Moving more clients to Cloud technology;

Why would an auditor recommend to a client they should move to the Cloud? Surely this means that it makes it easier for a client to switch auditor? Surely this means that the audit process will become easier and therefore there will be downward pressure on fees (isn’t there always!)?

If you are asking yourself the above questions then you need to re-assess your view-point to become a glass half-full one.   Transparency is what matters here and it’s far easier to audit a Cloud based business than it is an in-house computer system which could have many transactions “off-line”.

Recommending a move to the Cloud that helps your client become more efficient, more informed and more profitable can only improve a relationship. Making the audit process easier makes you become more efficient, informed and profitable. Lower fees due to lower work-loads means you can increase the number of clients you manage, thereby increasing profitability per capita. This is especially true if you are an early adopter in an increasingly competitive market – Adaptation doesn’t just mean survival but can also mean prosper, and is certainly a better outcome than extinction.

  1. Implementation of data analytical models

Data analytical models sound very complex – but really aren’t. There are already Cloud systems that have the functionality built within them that are very early versions of complex data analytical models. They allow you to query a database of transactions and spot outlying transactions in a matter of seconds. Whilst these are very early versions of what the future holds (think Commodore 64 computers of the 1980’s) they are nonetheless very real technological advancements.

  1. Graduate intake becoming a mixture of IT graduates as well as Accountancy

This is very much a slow and gradual shift that will be seen in the auditing market. The new type of auditor will be a mixture of an IT graduate with post-graduate accountancy training or vice versa. Auditors of the future will need a mixture of skills in much the same way as retailers now need to be e-commerce specialists!

In summary, the change is already upon the industry. Those that adapt to the changing environment will prosper at the expense of those that do not. History, and indeed Darwin himself, has taught us this. If you believe this article and viewpoint is extreme then just think back to retailers who failed to spot the risks and rewards that were evident when the internet exploded onto the scene – think Our Price records, Woolworths, all the local Travel Agents, and the plethora of retailors that thought otherwise.

Referenced articles:

http://economia.icaew.com/news/november-2015/profession-is-sleepwalking-towards-a-cliff

http://www.icaew.com/~/media/corporate/files/technical/information%20technology/technology/providing%20leadership%20digital%20full%20report.ashx

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