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Why AI regulation must be stepped up

Author: ICAEW Insights

Published: 05 Dec 2023

Artificial Intelligence offers exciting potential benefits to the audit profession, but without regulation it risks creating as many problems as it does solutions, warn Andrew Moyser and Mark Lumsdon-Taylor.

Talk to any accountant in practice or finance director at the moment and there are three topics at the top of their agenda: disappointment around the lack of any progress on audit reform, questions around the role of AI in the accountancy process and how to use environmental, social and governance (ESG) reporting effectively.

At MHA we are particularly concerned about the absence of dialogue and lack of focus on regulation around the use of the AI on audit methodology and procedures.

There’s no doubt AI is already playing a major role in how audits are performed and the Big Four have already publicly announced plans to invest billions to ensure their teams have the right technologies at their disposal and are armed with the right skills. It would be helpful if some of the lessons they are learning could in time be shared with those who have less deep pockets for the benefit of the profession as a whole.

AI can be used across all areas of the audit, not just complex data processing. And we expect AI will continue to help better identify high-risk transactions, allowing us to keep our focus on risk assessment and judgement.

What AI will not do is eliminate the need for human auditors – sorry Mr Musk – but it will require a new breed of auditor trained to understand not just the potential, but also the limitations of the technology. The future is exciting, but it needs to be grounded in reality.

What the audit profession in the UK urgently needs is regulations in this area to at least start to address some of the potential challenges presented by AI as the explosion in its use propels it into the mainstream. The EU has made a start with its consultation paper on rules for safe and transparent use of AI and the UK should follow suit. Otherwise, we run the risk of each accountancy firm or network setting their own rules and doing their own thing in different jurisdictions.

At MHA, we also think that the audit profession can learn from the experience of ESG reporting where AI is helping with assessment, analysis and recommendations. External investors are pouring money into innovative solutions, new frameworks and different ways of working. 

Not only is the ESG reporting sphere rapidly developing in scale and scope, but there are also clear regulations and best practices starting to emerge, with the UK government actively talking to its EU counterparts to ensure a common playing field. The UK government recently announced it is to press ahead with plans to regulate agencies that evaluate the ESG performance of companies.

One area where AI is already making a major difference is in optimising resource utilisation. AI-powered algorithms can analyse vast datasets to identify inefficiencies in energy consumption, water usage and supply chains. There is the genuine hope and, in some areas, expectation that AI could be used to develop much-needed climate change solutions.

Despite the buzz surrounding AI, there is a need for realism and an acknowledgement of the potential costs of AI alongside its significant potential upsides. Leaving aside concerns around data bias, privacy and reliability, the energy intensive nature of AI data processing is cause for concern. The carbon footprint from training a single AI is equivalent to 10 times the lifetime emissions of the average car. Separate calculations put the energy usage of one super-computer as the same as that of 10,000 households.

The use of AI within audit and ESG should not be a free for all and the potential risks involved should also be transparent and mitigated as far as possible. After all, we all want AI to be part of the solution, not part of the problem. 

Andrew Moyser, Head of Audit & Assurance, and Mark Lumsdon-Taylor, Partner, MHA.

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