Why external auditors should rely on digital audits and sector knowledge

The CFO acknowledges the importance of a good audit. The most recent CFO Barometer sheds light upon company views of the external auditor.

The CFO Barometer survey on audits was held shortly prior to the lockdown. Therefore, we decided to focus primarily on the qualitative aspects of the study. Below we contextualize the findings. In general, audit quality is meeting CFO demands, but there is still room for improvement.

Choosing between Big Four auditors and mid-tier auditors

Almost all respondents (95 percent) are obligated to assign an external auditor. Of that 95 percent, over half assign the external audit to one of the so-called Big Four: internationally reputed audit firms. The respondents also indicated why they either choose one of the Big Four or why they opt for a mid-tier auditor.

The main reasons why respondents choose one of the Big Four auditors are:

• they have an international reputation with access to a wide network,
• they use more advanced technology and digital methods, and
• they provide quality audits based on data analysis and broad sector knowledge.

The main reasons why respondents choose mid-tier auditors are:

• they provide a sense of familiarity,
• they charge lower audit fees, and
• the audit team rotation is less profound.

The survey shows that, when it comes to the relationship between company and auditor, independent professionalism is not always prioritized over personal contact, even though it is more important for good-quality audits. The audit cost needs some nuancing as well. Firstly, audit fees reflect the time and quality of the audit. So, they vary greatly between audits and depend largely on the technology used and the frequency of the auditor rotation. Secondly, our view is that Big Four audit fees are not significantly higher than fees of mid-tier auditors or single practitioners. In fact, the increased complexity of the external audit and additional issues – including changes in compliance and specialist use – has notably increased the amount of time spent on an audit, while the audit fees have not risen evenly.

Lastly, the rotation within the audit teams is more profound since recent years, mainly because of increased new requirements in compliance. We have noted that the growing administrative work has led to frustration with customers and auditors alike. Meanwhile, many young auditors feel encouraged to seek more challenging jobs outside of compliance. We see this as a challenge for the sector at large. The auditor job needs to stay attractive. That only benefits both customers and auditors. In the current state of affairs, the frequency of the rotation in audit firms is already lowered, and the prospect of changing jobs is also less attractive while the crisis continues.

The added value of external auditors

Survey respondents agree on the added value of an external auditor. By virtue of the independent auditor, a truthful and errorless picture of a company’s financial position can be obtained. As the survey has shown, contemporary auditors live up to those expectations. At the same time, there is room for continuous improvement, by using data analysis, technology and artificial intelligence.

Three out of ten respondents note that the quality of the audit changes over time. We can offer a dual explanation. On the one hand, it is clear that we’ve changed towards a more risk-based audit. On the other hand, the introduction of digital audit methods is leading to better quality audits. Data analysis allows for an assessment of a company’s entire data set, instead of having to rely on audit sampling. This in turn provides the auditor with the means to focus more on transactions that deviate from the standard.

EY invests in specialists and data analytics

EY meets the increased demand for quality audits by investing in specialists with a broad sector knowledge, like for example IT auditors, and by investing in continuous training of those auditors. The survey respondents also indicate a strong need for digital audits. Hence, EY invests in data analytics, including process mining, to continue to improve the quality of our services and gain further insight into company processes. This will increase the added value of audits all the more.