5 minute read 18 Sep 2020
Why external auditors should rely on digital audits and sector knowledge

Why external auditors should rely on digital audits and sector knowledge

By

Leen Defoer

EY Belgium Assurance Leader

Committed to delivering globally consistent and high-quality audits. Promoting D&I. Connecting people. Enjoying quality time and holidays with my husband and daughter. Foodie and hobby cook.

5 minute read 18 Sep 2020

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.

  • CFO Barometer

    The CFO Barometer is an independent research initiative of the editors of CFO Magazine in cooperation with EY Belgium. A questionnaire concerning an actual CFO topic was answered by a representative sample of around two hundred Belgian CFOs from medium-sized to large multinational companies.

    The focus of the CFO Barometer is local, so the results are very representative of the Belgian market and as such the CFO Barometer becomes a benchmark tool for the CFO active in Belgium. The results are shown here and commented on by specialists and illustrated with practical experiences.

Streamlining processes through internal audits

The first phase of audits for the year 2020 has commenced. But the results of the survey start off with two remarkable figures. Firstly, less than half of the CFO respondents can rely upon an internal audit department. Secondly, only 13 percent of those companies state that internal audit is part of their daily routine. The majority execute an internal audit only once a year. Considering 70 percent of the participants conduct activities abroad, one would think these companies would value a better maintained internal audit department. We believe that they could get more opportunities to streamline processes if they did.

More potential to be found in internal audits

Internal audits have a lot of potential, but it often remains unexploited. Aside from the fact that internal audit is a means to gain insight into internal processes, it also allows for a more efficient way to track down fraudulent activities, or to increase the overall efficiency of the company. This may require an investment, but a worthwhile one.

However, a company can only succeed in properly maintaining internal audit when there are the people and the means to do so. And there is also the danger of a conflict of interests, as internal audit evaluates the companies’ own finances. That is one of the reasons why a company may wish to rely on external consultants instead.

Graph: Who do you turn to for external audits?

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.
Companies increasingly view an auditor’s sector knowledge as important, which indisputably improves the quality of the audit.
Leen Defoer
EY Belgium Assurance Leader

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.

Graph: How do you measure the audit quality of the external auditor? (Scale from 1 to 5)

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.

Graph: How do external audits provide added value?

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.

Graph: To what degree doe recent audit technologies impact the quality of the audit? [Answer: 3.40, Scale from 1 to 5]; To what degree deos digitalization impact the quality of the audit? [Answer: 3.52, Scale from 1 to 5]

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.

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Summary

The CFO acknowledges the importance of a qualitative audit. The recent CFO Barometer surveyed financial leaders on their perspectives of internal audits and external auditors. In general, the survey showed that they are satisfied with both, but there is still room for improvement. Using data analysis, specialists with broad sector knowledge and artificial intelligence, the added value of the audit is sure to increase.

About this article

By

Leen Defoer

EY Belgium Assurance Leader

Committed to delivering globally consistent and high-quality audits. Promoting D&I. Connecting people. Enjoying quality time and holidays with my husband and daughter. Foodie and hobby cook.