We live in a world where rapid advancement in connecting people to each other, people to devices, and devices to other devices is the norm. And the technology enabling this connectivity – including platforms, collaboration software, messaging apps and portals – is providing an unprecedented level of accessible information. This ongoing technology transformation is often a challenge for an organization to keep pace with, but it provides an opportunity within the audit of public and private companies to increase transparency, improve risk assessment, automate manual processes, and ultimately, enhance audit quality.
Data mining and analysis is at the core of this connectivity for auditors. I’ve recently spoken with several manufacturing companies that are in the advanced stages of using sensors to connect machines and devices via the internet of things. And with financial services companies we are seeing collaboration on potential blockchain solutions that could allow them to process financial transactions and capture data faster and more securely. This connectivity is not only making it easier and more convenient for companies to conduct business but also facilitating the creation of a data-rich environment that can offer powerful insights, including within the audit.
When I speak to these companies, one thing is clear: they want their auditors to take advantage of advances in connectivity to deliver a digitally transformed audit.
What is a digitally transformed audit?
A digitally transformed audit relies on the use of digital channels from beginning to end, within all processes. It has three pillars, all underpinned by connectivity: automation, analytics and driving value through the digital client experience. Crucial to the success of a digitally transformed audit is its technological platform. This audit platform, just like all successful enterprise-wide systems, must effectively connect all members of the audit team with each other and with the audited company, as well as empower effective project management within the entire audit process.
A leading digital audit platform is typically dynamic in that it digitizes the generation of work papers, acts as a central repository for relevant data, provides accurate, real-time updates on the status of the audit and enables auditors and companies to exchange information quickly and securely. It should also have mobile functionality so that everyone involved with the audit can interact, wherever and whenever they want. In short, it is the platform’s comprehensive functionality and connectivity that empowers users. In a world of data privacy and disparate data regulation across various countries and jurisdictions, to achieve this connectivity requires effective planning and a focus on issues, including data security.
Connectivity: opportunities and challenges for the audit
Greater connectivity presents significant opportunities to benefit from a digitally transformed audit. At the same time, it presents some challenges that need to be managed.
Companies can benefit from a digitally transformed audit by taking the following steps:
- Making an increased volume of data available to their auditors. Many companies are already using central repositories known as data lakes to store all their structured and unstructured data at scale. Furthermore, the rise of enterprise resource planning (ERP) systems means more financial and operational data is easily available and better harmonized. Since auditors can now use analytics tools to test entire data sets, in addition to relying on the sampling techniques used in the past, they can tap into this wealth of information to identify significant or unusual patterns or trends, as well as opportunities and risks.
- Gaining a deeper knowledge of their general ledger so that they can monitor fraud controls and improve their financial reporting processes. Full analysis of the general ledger is not only useful for identifying patterns and outliers but also for shining light on processes followed by staff when they record financial transactions. Who is recording what, and why? Which transactions are carried out on a manual basis and how are transactions being reversed? Are fraud controls operating as expected? The insight generated by this analysis can be used to improve a company’s financial reporting process now and in the future.
- Broadening the scope of data in digital format that is included in the digital audit. This may include unstructured data that was not previously available in a digital format or did not even exist in the past. Examples include contracts, warranties and data relating to provisions for future liabilities. Bringing this digital information into the scope of the analytical audit applications helps enhance quality by providing an improved basis on which auditors can make judgments.
- Encouraging the finance and IT teams to share information and systems access with their auditors. When information is shared securely and efficiently via a fully digital audit platform, the audit process will run more smoothly and audit quality can be improved. The company’s own finance team will also avoid duplication of effort and save time supporting the audit, since different people will not be asked to provide the same information.
The key challenges that need to be managed when deploying a connected, digital audit include:
- Cultural challenges. Some organizations may be reluctant to share information with their auditors via an online platform. This may be due to a lack of familiarity with the audit platform, worries around how the information will be used, or concerns about data security.
- Data security. Greater connectivity in the audit potentially exposes companies to data protection and security regulatory issues. For example, the European Union’s General Data Protection Regulation incorporates strict rules on how personal data should be collected, processed and stored, with companies that breach the rules risking heavy fines and the possibility of incurring serious reputational damage. So, companies should be careful about which data they share with their auditors and ascertain that this data is appropriately processed and stored.
- Complicated legacy systems. Outdated and cumbersome IT systems can prevent a company from taking full advantage of a connected, digital audit. Furthermore, some of the information and data that needs to be considered as part of the audit process may not be available centrally in a structured format. It may still only exist in paper form and be stored in disparate locations around the world.
Considerations for CFOs, chief technology officers (CTOs) and audit committees
So how can companies harness the power of connectivity to benefit from a digitally transformed audit that enhances audit quality while delivering additional value to the business?
If you are a CFO, you can:
- Set the right tone at the top. For your digital audit to be successful, you need to be clear from the start about the business benefits that it will bring to the organization and your stakeholders.
- Anticipate the need for cultural change. Your finance team must get used to a new technological system for the audit and adapt to new ways of working with the auditor. For example, the audit team may ask questions never asked before and your finance team may have to do things it has never done before.
- Understand that a successful digital audit depends on auditors having access to your organization’s data, systems and analytical applications to avoid duplication of effort. Find out what access the audit team will need from your IT function and have them outline the company’s main data and security controls that will need to be complied with.
- Learn from your auditor’s leading practices. By learning from what your auditor does, you may be able to improve the deployment of technology within your own organization. For example, there may be opportunities to generate additional value from data that you are not currently taking advantage of.
If you are a CTO, you can:
- Be proactive about building relationships with your company’s auditors. Ask them about the data they will need, and when, to help them deliver a high-quality audit. Work with them to provide them this data in the most appropriate format for its purpose.
- Get to know the audit platform used by your audit team. Your auditors can explain how the platform works, the security controls that exist, and how your data is stored and protected. With this knowledge, you will be able to identify opportunities to share information more effectively and reassure other stakeholders about how your company’s data is being used in the audit process.
- Work with your auditor to develop a multiyear implementation roadmap of digital capabilities. This will support the deployment of audit technology at a pace aligned to your own digital transformation.
- Explore the potential for creating automated, repeatable processes that support the audit. Repeatable processes are key to providing auditors with the up-to-date data that they need to generate real-time insights. They also reduce the administrative burden on your finance team.
If you are an audit committee member, you can:
- Invest in understanding what a digital audit is. What possibilities will it open to the business, including improving the efficiency of processes, the effectiveness of controls and the insights that can be gained from data?
- Ask questions of your auditor. Discuss with your auditor the benefits of a digitally transformed audit. Evaluate the data and insights together with the audit team and engage in a dialogue with your auditor to provide additional information when necessary. It may be that your company is not taking full advantage of the opportunities from a digital audit.
- Make it clear to your management team that you support the value a digital audit provides. Show that you are supportive of your company’s efforts to digitize as much of the audit process as possible and leverage the benefits of your auditor’s technology investments.
- Advocate for investment in IT infrastructure that supports the digitization of financial and audit processes. A company that has a modern, robust IT infrastructure and harmonized data will benefit more from a digital audit than one that does not.
Thanks to technological advances, auditors today are more closely connected with each other and have access to more company data than ever before.
My feeling is this connectivity will help enable the emergence of continuous auditing once organizations’ processes are more automated and timelier. This will allow for more frequent access to company data during the year, which contributes towards continuous auditing. Soon, a digitally transformed audit will seem unremarkable; it will simply have become the default way to audit.
In fact, given the way the world is changing, a digitally transformed audit is the only kind of audit that will be fit for the highly connected and digitally transformed organization of the future.