Where is Technology Taking Audit & Accounting Today?

Digitalization is rapidly changing all forms of the finance function, including audit. The Financial Education and Research Foundation (FERF) surveyed Financial Executives International members and discovered that senior-level executives are overseeing a rapid evolution of the audit.

In order to understand where technology is taking audit & accounting today we spoke to Deloitte's Amy Park. Amy Park is an audit partner in Deloitte’s National Office Accounting and Reporting Services specializing in technical accounting matters in consolidation, financial instruments, and lease accounting. She also serves on the AICPA’s Digital Assets Task Force, focusing on accounting matters. Amy served as a practice fellow at the Financial Accounting Standards Board.

Financial Education and Research Foundation: How do accounting standards need to evolve with the adoption of technology?

AMY PARK: Evolving technology has a widespread impact on the entire accounting ecosystem. Companies adopt different technologies for their businesses, auditors not only evaluate their clients’ use of those technologies but also use different technologies to innovate their audits, investors use technology to digest and understand financial reporting, regulators evaluate technology used by those it regulates. Standard-set ters are not shielded by the expansion of technology. They, too, evaluate whether existing standards are appropriate or need to evolve with the adoption of technology.

The Financial Accounting Standards Board (FASB) is the standard-setting body that establishes generally accepted accounting principles in the US. Since technology has resulted in new types of assets and arrangements that previously did not exist, the FASB assesses whether US GAAP has any “gaps” in accounting related to new technologies. For example, the FASB recently issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which amended the accounting for internal-use software to incorporate cloud computing arrangements. The FASB, through its Emerging Issues Task Force (EITF), recognized challenges by companies that were implementing cloud computing within their organizations, specifically how to account for the related implementation costs. Existing GAAP on internal-use software provided a basic framework, but amendments were necessary to address the nuances related to cloud computing arrangements.

Technology may result in new assets and arrangements where existing accounting standards may not provide an appropriate framework. For example, the FASB has an open agenda request related to the accounting for cryptocurrencies, such as bitcoin. Under current US GAAP, many believe cryptocurrencies would be accounted for as an intangible asset but some question whether the resulting accounting as an intangible asset appropriately reflects the economics of holding the cryptocurrency. The FASB is currently evaluating this agenda request.

The need for change in accounting standards is not limited to the US. Internationally, other standard-setters are faced with the same challenges responding to technological change. The Accounting Standards Board of Japan (ASBJ) recently issued an accounting standard for cryptocurrencies and the International Accounting Standards Board (IASB) has asked its International Financial Reporting Interpretations Committee (IFRIC) to also consider whether standards need to be amended or created for cryptocurrencies. As technology continues to evolve, standard-setters will be faced with the challenge to create accounting standards that will stand the test of time with the rapid pace of change in technology by its stakeholders.

FERF: Where do you see significant gains to be made in the audit process as a result of new technologies in terms of quality, value or insights?

PARK: New technologies will transform the audit of the future and result in significant gains to quality and value delivered to clients. By leveraging technology-enabled solutions, we can pinpoint risks that help focus our audit effort where it matters most. Coupled with increased efficiencies, auditors can provide more value-added insights for their clients to consider through advanced data analytics. By enabling the analysis of entire sets of financial transactions, audit analytics aids in the interpretation and management of a growing storehouse of audit information. Audit analytics helps mine massive data sets to deliver smaller subsets of high-value data for the auditor to evaluate, improving both audit quality as well as the value of business insights an auditor is able to deliver. New audit tools and use of technology, such as artificial intelligence, along with data analytics, help auditors to enhance risk- assessment and identify trends.

New technologies provide (1) greater transparency through near-real-time analysis and identification of deviations, (2) accessibility through larger volumes of data and (3) greater precision through the ability to identify trends and anomalies in an entire population of data rather than traditional sampling techniques. The benefits in the audit process from new technologies and access to greater amounts of data ultimately benefit companies.

FERF: How can preparers gain greater certainty around the quality of their accounting and operational data?

PARK: The potential benefits regarding new technologies related to the quality of a company’s accounting and operational data are largely dependent on the reliability of this information with the increased volume of data. To achieve this, companies should consider security, completeness and consistency. Security: The onset of cloud computing solutions and storage of data requires safeguarding these systems and data from unauthorized access and cyberattacks. Companies need to implement processes to keep data safe and reliable, and reduce the risk of data manipulation and unauthorized access. Completeness: Incomplete data could reduce the value of the data by generating false positives with outliers, trends, etc. Manual processes should include logic to ensure all data is submitted and companies can include functionalities to automatically reconcile data populations. Consistency: Not only is the completeness of the data critical, but consistency in how the data is input and interpreted is also important. Standardization of processes and data input fields, for example through the use of drop-down fields, can result in consistent data across an organization.

FERF: How different will today’s audit process look 10 years from now in terms of resources, such as personnel and technology.

PARK: Resources utilized in the audit process, both from a personnel and technology perspective, have changed over the past 10 years, and will continue to change in the future. The greater volume and higher quality of data now available has allowed auditors to respond by implementing more focused analytical procedures. With this change, the composition of the traditional audit team will also change, calling upon different skill sets and educational backgrounds than those traditionally recruited by public accounting organizations. There will be a greater emphasis on the ability to work with large sets of data and a statistical background, but an accounting background will also continue to be critical. A key will be to find personnel who can manage, interpret and draw conclusions from a data set, and also evaluate the impact of those conclusions on the financial statements. Artificial intelligence can reduce the need for certain traditional auditor skill sets that were oftentimes time-consuming. Even as audits become more automated, human auditors will continue to play an important, if substantially different, role. Some will engage closely with advanced audit analytics and automation systems. Others will assess high-level outcomes of automated and semi-automated audit processes. And they will undoubtedly continue to deliver value by evaluating key assumptions, appropriately challenging conclusions with professional skepticism, and adding value to the overall financial reporting process.

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