CFRI 2016

Cognitive Tech Is Revolutionizing the Audit

The audit profession and the organizations they serve recognize that a data tsunami is on its way, with today’s consumers and businesses producing more data in a year than prior generations produced in their lifetime.

With the digitization of our society and our lives, everything creates data. As a result, the auditing profession must develop and deploy advanced technologies to harness this explosion of data, and unleash the insights embedded within it, in order to advance audit quality and provide a deeper understanding of business and financial reporting risks, processes and controls.

A recent Forbes Insights survey found that 58 percent of auditors and businesses believe technology will have the single biggest impact on the audit over the next three to five years.  And by 2020, smart machines will be a top-five investment priority for more than 30 percent of chief information officers. Perhaps that’s why more than two-thirds of CEOs in KPMG’s 2016 CEO Outlook survey said the next three years will be more critical for their industries than the previous 50 years.

What’s more, there’s widespread agreement that the impact of this innovation revolution will be positive for organizations that engage auditors: 59 percent of respondents to the Forbes survey agreed that advanced technology will enable a deeper, more sophisticated analysis of data as part of the audit.

How does it work? Cognitive technology (also frequently referred to as cognitive automation or artificial intelligence) essentially is an algorithm or chains of algorithms that enable software to absorb information, and reason and think in ways similar to human beings. When combined with advances in digital automation, process automation, and data and analytics (D&A), cognitive technology can have a profound impact across a broad spectrum of working environments and occupations.

The power and flexibility of cognitive technology is well-suited for professions where knowledge workers predominate. For example, the technology can be used to schedule airline flights and navigate airplanes from one location to another. Just as impressive is its impact in the medical profession, where highly sophisticated technology is used to diagnose disease and help doctors research effective treatment protocols.

In the audit context, cognitive technology allows auditors to obtain and analyze information from non-traditional sources, including social media sites, TV, radio and the Internet, and determine if any of this external information may impact an audit, either directly or indirectly. The auditor can then combine and process all of this information, together with the client’s own financial and other records, and through the use of advanced analytics draw a deeper, more robust understanding of potential risks. These capabilities can also help increase the level of detail available for review, and the speed with which very large amounts of data can be evaluated.

“Auditors can then use this analysis to deliver high quality audits that dig deeper into the data and reveal more about a business and its risks,” stated Marc Macaulay, KPMG’s US Cognitive Technology Audit Leader. “The bottom line is that cognitive technology will enhance the ability of auditors to conduct a more detailed evaluation of financial and other information, pinpoint data outliers and anomalies, and identify potential reporting, controls, or process issues more readily.”

Below are some specific examples of how cognitive technology can benefit an audit:

  • Revenue recognition: With the combined power of D&A and cognitive technology, an auditor’s judgment on whether a company reasonably recognized revenue will be based on a far greater percentage of transactions and with greater global consistency. The speed, depth and breadth of analysis simply cannot be matched by a human auditor alone, or even a team of auditors.
  • Valuation of assets: Machine-augmented capabilities will allow auditors to test a company’s valuation controls more quickly and comprehensively. They will, on a more timely basis, be able to make a judgment on the reasonableness of the organization’s valuation and explain why it is (or is not) reasonable.
  • Bank loan portfolio: By analyzing larger amounts of both structured and unstructured data that comprise a credit file, cognitive technology can aid auditors in gaining a more detailed and comprehensive understanding of credit risk and potential audit exceptions based on loan grading. It can produce a better understanding of a company’s overall risks and control environment.

Final thoughts

Cognitive technology presents a powerful and eventually indispensable tool in the audit process. But at the end of the day, it’s still a tool. It’s an audit professional who makes the critical decisions and has the responsibility to make the final call on the audit opinion.

Auditing firms that make significant investments in these powerful, innovative technologies – and combine these capabilities with the skills and knowledge of qualified professionals – will be the ones able to deliver high quality audits with deeper insights on an organization’s controls, accounting practices and reporting processes.

Want more insights on the growing importance of cognitive technology in the audit?  Click here to read KPMG’s new report: Harnessing the power of cognitive technology to transform the audit and register for this month’s CFRI conference to attend KPMG’s session, Game Changer- How Advanced Technologies are Transforming the Audit. This session, intended for non-IT professionals, will explore the impact of digital innovation – specifically the intersection of cognitive technology and data and analytics – on auditing and financial reporting. Using practical examples, KPMG will discuss the implications of how advances in computer processing power and analytical capabilities will transform the way data is understood and used and, ultimately, how technology can enhance audit quality and financial reporting decisions.

Marc T. Macaulay, Partner, KPMG LLP can be reached at mmacaulay@kpmg.com.