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Audit and technology

The future of audit technology, part 2: mid-tier firms

Author: ICAEW

Published: 06 Jun 2023

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Strategic partnerships with technology specialists and a rigorous understanding of data are key to helping mid-tier firms seize the opportunities of a digital future.

In recent years, mid-tier audit firms’ adoption of cutting-edge technologies has fallen under the microscope of national innovation agency Innovate UK. From 2018 to last year, its Next Generation Services programme awarded £20m to 40 projects designed to stimulate research and development around artificial intelligence (AI) and data-driven solutions in the professional services arena – including accountancy.

One advisory outcome of the initiative was the report AI Readiness: a collaborative design toolkit for professional services firms. To follow that up, Innovate UK has partnered with the Economic and Social Research Council to launch what it calls Innovation Adoption Accelerators at a handful of universities, to support firms’ efforts to boost their technological savvy.

“For example,” explains Stephen Browning, Next Generation Services Challenge Director. “They would help accountancy firms – typically at mid-tier level – to understand what they need to change in terms of culture, technology or process to initiate or deepen their engagement with these tools.

“The goal is to raise the sector’s capability to engage with innovation. Until that happens, we will see a steady adoption of off-the-shelf products among mid-tiers. But what firms must recognise is that collaborating with technology providers to develop their own solutions is something they themselves can do – and need to do – to rapidly advance.”

Bolstering insights

One firm that is already making strides in that direction is Evelyn Partners. “We have an in-house technology team,” says partner Chetan Mistry – head of the Innovation and Change project within the firm’s audit practice. “But we’re taking a hybrid approach. So, we know what we’re good at – in other words, we know that our specialisms are audit, tax and accounting, alongside working with our clients. But we’re partnering with digital innovation companies that know how to effectively deliver value-added outcomes in a technology framework to help with our innovation projects.”

Evelyn Partners is currently focusing on ramping up its data analytics capabilities, to bolster the insights of its audit team. As such, Mistry says: “We’re exploring applications for machine learning AI in areas such as process mapping, so we can more fully understand our clients’ operations. But while continuous auditing has become a buzz phrase in that context, our clients are less inclined to go down that road for the time being. They may wish to have more regular, interim touchpoints – say, on a quarterly basis – but equally, they do like taking breaks from external auditors, too.

“At present, then, the real challenges are helping our clients understand how and why we’re extracting all the data points we use – and, in particular, passing various infosecurity hurdles. We must understand clients’ data infrastructure to ensure the connections between our systems and theirs are mutually secure, so we can obtain the information we need.”

Embedded protocols

For John Toon – Tech Strategy Lead at Beever and Struthers – the plethora of data-crunching tools now available to auditors is having an increasing influence on how tasks such as root cause analysis are carried out.

“Inflo, MindBridge and Caseware are in use among mid-tiers quite predominantly,” he says. “Bigger products such as Validis are used by some of the larger mid-tier firms and, in the past couple of years, we’ve seen a transition to open banking analytics through the likes of Circit and Confirmation – plus, a steady uptake of application programming interface (API) tools, such as Plaid and Codat. Those sorts of platforms are playing an ever greater role in the execution of traditional tasks. But there are challenges.”

Toon explains that, for many mid-tiers, it is still very early days – and most of them will be following time-honoured auditing methodologies, such as Mercia, PCAS or HAT Group, which are third-party written and embedded as protocols within their existing systems.

“At present,” he says, “methodology providers are not adapting to regulators’ expectations that analytics tools will be used in areas such as root cause analysis, as a fundamental part of the audit.”

Inquisitive mindset

In parallel, the need for auditors to be able to understand and evaluate new technologies that they and their clients are using is presenting mid-tier firms with a steep learning curve.

“There are hundreds, if not thousands, of accounting systems in operation in the UK,” Toon says. “My firm has almost 2,000 audit clients. So, we could potentially have 2,000 separate systems in our orbit, all with different levels of technology implementation – from products with no automation at all to suites fully integrated with API-connected software that will push and pull transactions between multiple platforms at multiple levels, supported by automatic approvals.”

Toon adds: “It’s impossible to educate our teams about every single system. So, the likely way ahead is to take a risk-based approach and assure ourselves that, in time – with the aid of technology such as robotic process mining – we’ll improve our level of exposure to different systems. And our level of scrutiny, too, in terms of knowing how to ask our finance director clients the right questions about how their systems work.”

According to Mistry, mid-tiers must apply a similarly inquisitive mindset to the process of auditing the emerging crop of pure-play digital companies – particularly in sectors such as crypto and gaming – which may have somewhat non-traditional business models. 

“Auditors must invest time into understanding what their clients do, how they operate and what their long-term objectives are,” Mistry says. “While auditing digital companies, we’ve found that they produce reams and reams of data around their activities. So, it’s critical to understand that data estate and maintain extremely clear communications with the client on how they get comfort and assurance around those numbers. Have they considered the robustness of all the various data sources they use?”

Managing exceptions

Data is also a crucial factor behind mid-tier firms’ evolving usage of open banking APIs – which, as a result of regulatory shifts, are enabling auditors to access a much larger universe of information about their clients’ finances. 

“With that increase of data,” Mistry says, “we’re seeing a growing opportunity to provide wholesale comfort – for example, by carrying out 100% population tracing and then looking for exceptions.”

However, Mistry notes, there is also an element of risk attached to that. “The more data we have, the more we must obtain assurance on, in order to ensure we haven’t missed something important. So, there’s an imperative to make sure that as an organisation – and, indeed, an industry – we understand how to manage that process, and how our roles and responsibilities work within it. For example, we’re not there specifically to provide 100% confirmatory assurance, but to ensure there’s reasonable assurance – verifying that our client’s financial statements are not materially misstated, and are both true and fair. That’s why, in an open banking context, the exception reporting takes on such significance. Amid growing volumes of data, exceptions may be where our risk exposure really lies.”

So, to what extent do our mid-tier experts think new technologies are disrupting traditional distinctions between small, medium and large audit firms? “While these tools are based on similar principles,” Toon says, “the analytics capabilities in operation at, say, KPMG are still fundamentally different to what exists in small firms. Going forward, it will all come down to a mixture of service quality, sectoral expertise and, of course, price.”

Mistry agrees. “Technology is only an enabler,” he says. “We are focusing on leveraging technology in the right way. However, for us, delivering a high-quality service is all about the people, the mindset and our commitment to ethics. Technology allows us to modify how we demonstrate value to clients – but the practical realities of adopting tools such as AI are different to how they’re often portrayed. The differentiator will always be people.”

Browning takes a similar stance. “Many auditors are still wondering whether AI will steal their jobs. Our firm belief at Innovate UK is that that’s not going to happen. Automation will remove some of the more repetitive, manual tasks – but that will open up opportunities for auditors to think more strategically about what’s going on both in their own firms and their clients’ businesses.”

Annual Conference: Technology

Technology is rapidly evolving, and AI is transforming the way we work and communicate. ICAEW's Annual Conference 2023 focuses on the need for accountants to adapt and stay up to date.

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