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Audit and technology

The future of audit technology, part 1: small firms

Author: ICAEW

Published: 06 Jun 2023

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While still in many cases at a nascent stage, use of AI and open banking tools in small firms is spurring a democratisation of the audit market.

Innovative technologies are making inroads among small audit firms in various, different ways. “We do see new, AI-enabled audit firms emerging,” says Fast Future CEO Rohit Talwar – a prominent futurist and business consultant. “My sense is that many of them are founded by former partners and senior managers of larger firms who leave, take some clients with them, and purchase AI software to enhance their offering but don’t really intend to set up fully automated practices.”

A much smaller sample – formed of younger founders who have appraised the challenges and opportunities around how audit typically works – are far more inclined towards full automation. “They will either build their own tools,” Talwar notes, “or partner with specialist providers and say to clients, ‘Here’s the core audit service we can offer in an automated way, and here’s the added value we can bring with our expertise in your sector or business size.’”

In parallel, there is a third option: the long-established, traditional firm that plugs into new approaches. Samantha Bowling is a partner at Garbelman Winslow CPAs, a 75-year-old firm with fewer than 20 employees, based in Maryland, US. In 2017, the firm adopted machine learning artificial intelligence (AI) in the shape of Ai Auditor – a solution from leading provider MindBridge. Based on her experience, Bowling says, small firms are using AI in audit for risk assessment, planning and sampling.

“AI enables firms to begin risk assessment during the year being audited,” she explains, “and then re-evaluate risk after the final, year-end close. That provides the opportunity to find issues and alert the client before the year is over.”

Professional judgement

At present, Bowling notes, the concept of continuous auditing – unrestricted by quarterly or year-end rhythms – is a “future opportunity” for small firms. “The technology would support that if there were a department dedicated to year-round auditing,” she says. “Our current business model does not support that, because of how our professionals divide their time between various tasks.”

However, she points out, AI is “streamlining the process of root cause analysis” in audit, enabling small-firm end users “to see critical infrastructure issues in real time, and expedite resolutions”.

In risk management and audit sampling, meanwhile, small firms are using AI to automate processes. “This enables auditors to use their professional judgement and scepticism to analyse anomalies that the technology has identified,” Bowling says, “and develop an audit plan based on risk at transactional level.”

Another, critical area in which tech-savvy, small-firm auditors must increasingly exercise their professional judgement is that of auditing the very technology they are using, as well as their clients’ finances. Bowling stresses: “It’s imperative for auditors to understand why and how AI detects an anomaly. The AI should be explainable and verifiable. Auditors should also be cautious of any biases that may be built into the AI – and be sceptical of the results.”

Proper visibility

Outside the advancements of AI, the efficiencies stemming from a crop of new banking tools are no less compelling for small firms – as Gilberts, a three-partner firm based in St Albans, has found. Gilberts uses the Thomson Reuters-owned suite Confirmation to expedite its bank-confirmation process, in tandem with Inflo Treasury – a platform that harnesses the power of open banking to fine-tune the analysis of clients’ financial data.

“We had a centralised system for sending out bank letters,” partner Luke Parker says, “but there was no easy method to track them. And when you came to do an audit and found a request had gone astray, you’d have to send out another letter and wait two or three weeks for a response – so the lead time stacks up. There was no proper visibility on where in the process the letters were.”

Confirmation cut through those hitches: “You can essentially tee up confirmations in advance. They get requested straight away at the year-end date and more than likely – unless it’s a quick-turnaround audit – you’ll get the confirmations back before the audit even starts.”

Spotting outliers

Arising from regulatory shifts, open banking enables third-party service providers, such as fintechs, to access a broader variety of data points contained in bank customers’ accounts. A wave of new platforms has emerged to help users harvest that data for analytical purposes – including in audit.

For Parker, Inflo Treasury assists Gilberts’ audit process as a doorway to two years’ worth of a given client’s transactional data – with client authorisation for access built into the system. Meanwhile, its presentational functions provide for clear and thorough interrogation of that data. 

“How that works in practice is: you enter the client’s details at the planning stage, they authorise access, then you take an initial look at the data, look again at the fieldwork stage – and then perhaps once more just before sign-off. It provides comfort, it’s easy to search through and it’s useful in key areas of testing,” Parker says.

On that last point, Parker adds: “Because of the visual format, you can spot an outlier month straight away. So instead of testing randomly across the year, you can say: ‘OK, July looks a bit unusual – let’s select a few extra items from that month for our sampling, to make sure we’re picking up everything.’”

Smoother route

Parker urges other small firms to take care with how they select such products. “It’s different to being one of the bigger firms that can build their own software and make it bespoke,” he says. 

For around a decade the Big Four accounting firms have been experimenting with data analytics tools, but at the beginning the costs were punitive for small firms. Today, however, off-the-shelf products are giving smaller firms with fewer resources direct access to the same level of technology. Confirming this, and with regards to her own firm’s chosen solution, Bowling says: “Today, AI is affordable and available to every firm size.”

Parker and Bowling also agree that use of their respective technologies within small firms is still nascent – and, therefore, full of promise. “In five years’ time,” Parker says, “use of such technologies will be commonplace in the market. There will also be more information available on how different software tools can be linked to the audit process and the value they add. That will give smaller firms who are less comfortable with new technology a smoother route to adopting it.”

Bowling adds: “I believe there will be a convergence between auditing standards and forensic auditing. Small firms will change their structures to facilitate continuous and timely auditing services. They will have teams dedicated purely to audit and start to departmentalise – similar to how large firms operate.”

Shamus Rae – CEO of ICAEW-backed AI-driven auditing software provider Engine B – also sees a bright future ahead for small firms’ relationship with technology. “There’s a thriving, new marketplace where people are creating tools that are democratising some of the more complex audit processes,” Rae says, “and the tail firms can now access those capabilities. We call them ‘tail firms’ but some of them could end up being worth $3.5bn globally.”

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