accountingtoday.com January 2019 accounting today 9

SPEC

IAL R

EPO

RTAudit, disrupted

Technologies like artificial intelligence, automation and blockchain are transforming this core service

A supplement to accountingtoday

10 accounting today January 2019 accountingtoday.com

Special Report: Technology and the audit

Faced with vast pools of data, regulatory pressures, and growing client expectations, today’s auditors are walking a tightrope. It’s a balancing act that is no small feat, but innovative technologies like artificial intelligence and automation are changing the game and enabling auditors to do their jobs with less risk and greater efficiency.

“I think [auditors] continue to face more regulatory pressure and scrutiny, and they are being asked to do more and look at more now than they have been in the past. That’s not going to change. … The cloud has brought new life and new tools into the audit profession,” said Jeff Gramlich, vice president of business develop-ment at Validis, a provider of data-sharing and standard-ization technology.

Emerging and evolving technologies like artificial intelligence and automation, and, perhaps in the longer term, blockchain, are bringing about significant changes for the audit profession. The full impact of these technol-ogies remains to be seen, but the benefits and efficiency gains are becoming increasingly evident. And it’s just the beginning. In a 2018 Burrus Research-Maryland Associa-tion of CPAs survey of more than 1,000 CPAs and finance and accounting professionals, respondents said that AI, machine learning, and cognitive computing in audit and tax are the top trends that will transform the accounting and finance landscape over the next three years.

Furthermore, a 2017 survey by MIT Sloan Management Review and the Boston Consulting Group found that nearly 85 percent of business executives believe AI will allow their companies to obtain or sustain a competitive advantage, and more than 80 percent view AI as a strategic opportunity.

Understanding what these technologies mean for the audit profession and the opportunities they can bring is essential for the auditor of the future.

Artificial intelligenceArtificial intelligence and machine learning are becoming increasingly embedded in applications and processes, and one of the greatest benefits for the audit profession is the ability to process and analyze vast amounts of data in a way that a human auditor cannot.

As stated in a recent white paper by AuditFile and IntrapriseTechKnowlogies, “Today, instead of sampling,

The audit, transformed

By Antoinette Alexander

New advancements in technology are reshaping this core service

auditors can push a client’s entire general ledger through automated analysis using tools that perform a variety of analyses, designed by humans, and then provide lists of exceptions for the auditors to evaluate. Where machine learning comes into play is as the auditor confirms the exception or invalidates that exception, the machine learns to derive patterns from the auditor’s conclusions and attempts to identify additional data points about the positives and negatives to apply to additional exceptions it identifies.”

Many industry sources agree that, in the short term, AI and machine learning have the broadest set of available applications and the most potential for auditors.

“We see machine learning as one of the key early pieces. Where it can have a huge advantage within accounting and the audit profession, in general, is really in the processing and pulling in of standardized data or standardizing the data. Following that process, it also allows you to analyze huge data sets, including contracts and things that are more complex,” said Pete Myers, CEO of Auvenir. “That leads to more accuracy and frees up the human resources to focus on the client end — to focus on the areas that really require that human judgment perspective. It allows the auditors to maximize their time, analyze the deeper sets of data in the documents, and basically transforms the way audits are done.”

Auvenir, a venture founded by Big Four firm Deloitte in 2016, is an intuitive machine learning and AI-based platform that is designed to accelerate and automate the audit process and deepen intelligence for higher quality and greater efficiency. Tasked with developing auditing technology that could be offered to small firms, Auvenir is helping to level the playing field for smaller players in the profession. “We know that, historically, assurance software has catered, first and foremost, to the larger enterprises, and what we’re focused on is really to bring that technology to the smaller firm,” Myers said. ”We’re looking at emerging technologies and the best in class and partnering with the best in class to bring AI, machine learning, bringing big data, bringing contract analysis, and all of those components into the engagement into one place as a platform play. Part of that platform play allows us to bring that technology to the small firms in a cost-effective way, but also in a way that is seamless.”

spotlighton

ConfirmationBrian FoxPresident and founderConfirmation

How is technology going to change the audit?Technology helps automate staff-level manual work that

all of us loathe doing. It will allow us to test entire populations of data at the transactional level, rather than testing only samples. Where we used to audit from the top down — starting with the financial statements and drilling down to the detail level — we will move to auditing from the bottom up using complete data sets and building up to the financial statements. Best of all, auditors will turn our focus to fraud auditing, which is what the public has expected from us all along.

How are you helping accountants prepare for these changes?Confirmation operates at the intersection of efficiency and fraud detection with all of our global confirmation services. Our platform allows auditors to test entire populations of data with the push of a button and to confirm information quarterly, monthly, or even daily if they choose to do so, helping our profession drive toward a true continu-ous audit. With more than 1.5 million users including 16,000 audit firms and 200,000 auditors in more than 170 countries, Confirmation drives tremendous efficiency and cost savings for CPA firms while helping them catch billions in fraud over the past 20 years.

Confirmation is the digital platform and global network trusted by audit firms, banks and law firms to quickly and securely verify financial data. Founded in 2000, Confirmation invented electronic confirmations and reshaped and modernized the audit confirmation process. Today, Confirmation helps 200,000 auditors in 170 countries confirm more than $1 trillion in financial data every year. Our global network of validated responders includes 4,000 banks and departments and 5,000 law firms. Are you ready for fast, easy confirma-tions? Learn more at Confirmation.com.

See AUDIT on 12

12 accounting today January 2019 accountingtoday.com

Special Report: Technology and the audit

Also leveraging such technology is AuditFile, a cloud-based audit automation platform that incorpo-rates analytics and machine learning to help CPA firms run more efficient audits and improve process visibility.

“The ability for the software to recognize patterns and apply those rules to a data set independently is a powerful tool that can help auditors save time analyzing data. For example, AuditFile uses artificial intelligence to classify accounts to lead sheets on the trial balance. Perhaps more importantly, it will allow auditors to instead focus on the interpretation of the results,” said founder and chief operating officer Kevin Bong.

John Mark McDougal, practice leader of accounting and assurance for Top 100 Firm LBMC in Nashville, Tennessee, believes that leveraging innovation like AI and machine learning “makes you a better auditor.”

“That’s where you absolutely have the better audit and the better answers as opposed to sampling,” he said. “What it’s doing for you is allowing you to process extensive amounts of data very quickly, instantaneously actually, and work through volumes of information that you simply couldn’t do before. You definitely couldn’t do it efficiently. We’re not seeing it yet take the place of the humans, we’re just simply seeing it aid them in doing a much better and, I would say, a more efficient audit.”

Talon Woods, assurance partner for Austin, Texas- based CPA firm PMB Helin Donovan, agreed and said, “True machine learning is definitely the most likely of the emerging technologies to impact auditing in the next five years. In the near term, machine learning could be utilized to analyze cash receipts and disbursements for irregularities based on a given company’s historical trends. This could also be easily applied to a broad range of analytical procedures. Further out, tools may be developed to analyze industry-wide data, allowing auditors to further refine risks of material misstatements. This could allow for far more efficient audits.”

BlockchainWhile still in its infancy compared with AI and machine learning, blockchain’s potential impact on the audit profession is not to be underestimated.

What is blockchain? In a nutshell, it is a decentralized, digital ledger that keeps a record of all transactions that take place across a peer-to-peer network. Users, who must possess highly secure keys to access it, can post transactions, or “blocks,” to the database. Each block is timestamped and, once validated, entries cannot be deleted or altered. Blockchains can be either private or public. In recent years, blockchain technology has been spreading beyond its cryptocurrency roots and is now being tested in a broad range of business and financial

applications. In fact, a 2018 PwC survey of 600 executives from 15 territories found that 84 percent of respondents said that their organization has at least some involve-ment with blockchain technology. And, as noted by PwC, Gartner forecasts that blockchain will generate an annual business value of more than $3.1 trillion by 2030.

Taking note of its growing importance, PwC recently debuted a blockchain validation solution to help authen-ticate transactions for clients. The solution, which combines continuous auditing software and a blockchain rise and control framework, gives internal audit teams and business executives real-time access to view and test transactions on their blockchains. “As technology and business teams move from the pilot stage to production of their private blockchains, questions around risks and controls arise. While blockchains themselves are tam-per-proof, solutions built around the technology are subject to risk — just like any other IT implementation. A new audit approach is needed, one that leverages technology, accommodates increased transaction volume, and provides real-time data. What’s needed is a validation solution,” PwC stated on its website.

A blockchain has several valuable characteristics and can fill key roles, including establishing identity, recording transactions, and establishing contracts. This could have significant implications for audit.

According a recent white paper sponsored by the Chartered Professional Accountants of Canada, the American Institute of CPAs, and the University of Waterloo Centre for Information Integrity and Informa-tion System Assurance, “With blockchain-enabled digitization, auditors could deploy more automation, analytics and machine-learning capabilities such as automatically alerting relevant parties about unusual transactions on a near real-time basis. Supporting documentation, such as contracts, agreements, purchase orders and invoices could be encrypted and securely stored or linked to a blockchain. By giving CPA auditors access to unalterable audit evidence, the pace of financial reporting and auditing could be improved.”

However, in order to use blockchain as a credible data source, there must be an audit of the process itself to ensure system confidence and the integrity of the data. Therefore, blockchain not only has the potential to create the need for more auditors but also to give rise to a new flavor of audit.

“When we start to look at [blockchain] processing, when we start to look at security and, if I interject confidentiality in there, now we’re tying back to the traditional trust services principles, which is the basis of the SOC reports. So, we actually already have that foundation, it will just be on the blockchain itself,” said Donny Shimamoto, founder and managing director of IntrapriseTechKnowlogies, an advisory-focused CPA firm based in Honolulu.

Audit

See AUDIT on 14

spotlighton

CPA.comErik AsgeirssonPresident and CEOCPA.comHow is technology going to change the audit?We think technology is going to build trust and enhance insights in the audit. That’s a

powerful combination. With AI and blockchain, we can have the ability to review the entire range of datasets that support a financial statement. That will lead to better risk management and fraud detection, and also give CPAs and their clients better actionable insights into business performance and opportunities.

How are you helping accountants prepare for these changes?We’re playing a key role in innovation in both audit and assurance services. On the audit side, we’re helping spearhead the Dynamic Audit Solution with the AICPA, our technology partner CaseWare International and a consortium of leading firms. This is a multi-year project that is designed to help all firms with an audit practice. For assurance, we — along with the AICPA and CaseWare — have already launched OnPoint PCR, a cloud-based, guided solution for preparation, compilation and review engagements. Beyond these technology solutions, CPA.com also offers an array of training and learning resources to help CPAs hone new skill sets and explore new business opportunities, and we’ll be adding to these in the coming year.

CPA.com is known for bringing innovative solutions to the accounting profession, either in partnership with leading providers or directly through its own develop-ment. The company has established itself as a thought leader on emerging technologies and as the trusted business advisor to practitioners in the U.S., with a growing global focus. Our core mission is to drive the transformation of practice areas, advance the technolo-gy ecosystem for the profession, and lead technology research and innovation efforts for practitioners.

A subsidiary of the American Institute of CPAs, the company is also part of the Association of International Certified Professional Accountants, the world’s most influential organization representing the profession. For more information, visit CPA.com.

From page 10

14 accounting today January 2019 accountingtoday.com

Special Report: Technology and the audit

Echoing the sentiment, Auvenir’s Myers said, “There’s the potential for the rise of triple-ledger accounting. The idea where instead of just having the two parties keep ledgers, you’ve actually got a third party that is validat-ing the transactions in real time. So it’s potentially going to grant access to a trusted data source and allow that validation. … Now, there’s some caveats in there and one is around … whether that record would be recognized by regulators and courts and so forth. The other component in validating is, depending on the blockchain, you also need to then audit the blockchain and make sure the way that blockchain is structured and managed and run is something that could be depended on and there’s not an individual that could control the blockchain and change the blockchain. So we’ll see accounting professionals potentially spending more time validating that informa-tion point between the systems and validating the controls in place between the two parties. It could change the concept of audit.”

Underscoring the future opportunities for the profes-sion, the AICPA has outlined four potential new roles for CPAs and CPA auditors as a result of blockchain:

Auditor of smart contracts and oracles: Smart contracts can be embedded in a blockchain to automate business processes. In light of this, contracting parties may want an assurance provider to verify that the smart contracts are implemented with the correct business logic. A CPA auditor could also verify the interface between smart contracts and external data sources that trigger business events.

Service auditor of consortium blockchains: Before launching a new application on an existing blockchain platform or leveraging or subscribing to an existing blockchain product, users may want independent assurance as to the stability of its architecture. And, on an ongoing basis, an independent third party may need to provide assurance as to the effectiveness of controls over a private blockchain.

Administrator function: This function could validate the enforcement and monitoring of the blockchain’s protocols, and be responsible for the verification of identity or a further vetting process to be completed before a participant is granted access to a blockchain.

Arbitration function: For a permissioned blockchain, an arbitration function might be needed to settle disputes among consortium-blockchain participants.

Brian Fox, president and founder of Confirmation, a provider of online audit confirmations, said he believes that blockchain represents opportunities for the profes-sion but, at the same time, issued a word caution.

“Blockchain is not going to be the big, red ‘Easy’ button. In fact, we’re going to get ourselves in trouble if

we don’t understand the technology and what its true application is, instead of just hearing the buzzwords. There are true opportunities, but if all you’re doing is taking what existed before the blockchain and putting it onto the blockchain, you haven’t ever leveraged the technology and its unique capabilities.”

Added Fox, “There’s still a lot of proof of concepts that are being worked on. Other than digital currency, there hasn’t been a lot of valid proof of concepts that are actually working. There’s been some test cases and things, [but] I do think there are some significant opportunities.”

Prepare for successWith robust tools at their fingertips and the ability to efficiently provide deeper data analysis, auditors are ideally positioned to take on a greater strategic role in the years ahead and deliver higher-value insights to clients. According to industry experts, that’s why it is important that auditors view such technology as a friend, not a foe.

“At CaseWare, we believe, at a core level, that the traditional audit of today is definitely changing — new technologies are emerging and must be embraced in order to derive better business outcomes for audit clients. The role of the auditor will not be replaced but will be significantly shifted from a purely standard audit role to a more strategic business advisory role. Technology will be there to help and suggest where the risk lies, putting auditors in a position to create more value for both the clients and the stakeholders of the audit opinion. Technology and the technology drivers available today empower auditors to do what they were meant to do — allow for greater efficiencies to audit deeper and smarter,” said Ross Hampton, head of business develop-ment for the Americas at CaseWare, which provides cloud-enabled audit, financial reporting and data analytics solutions.

Said Robin Grosset, chief technology officer of MindBridge Analytics, “Everybody talks about the digital disruption that is being caused by technologies like artificial intelligence and how it’s disrupting many different industries. The best way to combat that disrup-tion is to engage with it. … Leverage the technology, see what it can do and learn by experience. I think it’s very important that people engage and learn by experience.”

Through the application of machine learning and AI technologies, the MindBridge platform is designed to detect anomalous patterns of activities, unintentional errors, and intentional misstatements.

Change can be scary but with the right mindset, staff, training and tools in place, auditors can be well-posi-tioned for success. “The skills and type of people you bring into your organization will be key. Your practice will need forward-thinking auditors who are able to learn, adapt and move with the technology that’s available. Having the mindset of how you take your profession and your practice through this evolution will be the best way

to prepare for this disruptive change,” Hampton said.Added Bong of AuditFile, “The changes don’t have to

be intimidating and they don’t have to be all or nothing. I would argue that the change only seems more significant because audit software is the last area to realize the significant advancements of the cloud computing era. Right now, today, we already have firms of all sizes, down to solo practitioners, that are using automation and using machine learning to work more efficiently. I find that the biggest shift is in the mindset — cultivating a culture that embraces fresh ideas and continuous learning.”

Gramlich recommends fine-tuning project manage-ment within the firm, along with making incremental changes and securing partner buy-in. “I think the best practice that we’ve seen over the years is to have a dedicated small group to start with implementing a change. Whether that’s one group within an office or one office in a multi-office setup. So, I would assign it to someone to take that small group and then realize that they can’t do everything they were doing. Give them the time to appropriately manage that. Project management within these firms, outside of the biggest, is really lacking,” Gramlich said.

Fox of Confirmation said it’s important to also think about how fraudsters will leverage emerging technologies and to not underestimate the importance of training staff on better fraud detection techniques: “If our staff doesn’t understand how fraud happens, we can’t hold them accountable and expect they’re going to catch fraud.”

Added Fox, “At Confirmation, that’s really why I built this business 20 years ago, it was to leverage technology for the benefit of the accounting firms and for the auditors. And it was to do two things: the convergence of efficiency and fraud detection using technology. And so, over the last 20 years, we’ve caught billions of dollars of fraud and we’ve provided tremendous efficiency to the accounting firms.”

Woods of PMB Helin Donovan also suggests brushing up on your project management skills and asking the right questions:

How does this effect our current processes? Do our current professionals have the necessary

skills, or can they learn the necessary skills, to operate with the new technology?

How does this effect our clients? What is the cost of the new tool or tools? What return will we see on the investment in tools

and training?“Once those questions are answered, it’s much easier

to develop an effective implementation plan that doesn’t disrupt operations more than is necessary,” Woods said. “I think professionals in public accounting are a savvy group that are used to keeping up with an ever-changing industry. However, those that are more comfortable taking on new challenges and learning completely new skills are going to be positioned for success.” AT

AuditFrom page 12