What’s driving change in the audit environment?

Robert Dohrer of RSM International examines how the use of technology and the changing views of regulators towards technological change are the driving forces of the audit industry.

If you have ever purchased a new car, the chances are you will have only noticed superficial changes between an older and newer model. In a similar fashion, an audit may look the same on the surface but the detail belies a whole range of transformations and changes. If we unpick the detail, there are two key developments that are changing the audit industry forever – the use of technology and the changing views of regulators towards technological change. These are the driving forces of the audit industry.

The primary factor propelling change in the audit profession is the expanding use of data, both by clients and their auditors. The role and use of big data has caused much needed disruption in the profession as the rapidly expanding use of data analytics recasts the role of auditors. Long gone are the traditionalists – they are making way for the digital transformers. As a great enabler, technology has created the space for advocates of data analytics to champion higher quality audit evidence than has been obtained in the past. Audit firms that do not innovate in data analytics quickly enough to at least keep pace with their clients will risk becoming less relevant in the financial information supply chain.

A second and related factor is the view of regulators with regard to innovative techniques being developed and applied by auditors. Regulators have to assess whether auditors have complied with professional standards, but there is little mention in the professional standards of innovative high quality audit procedures such as data analytics. Whilst the professional standards do not prevent an auditor from performing innovative audit procedures, these specific procedures are not referred to in the professional standards and that leaves regulators and auditors in an uncertain place. This uncertainty is in some cases paralysing innovation in the profession. This is a challenge that can be overcome by continuing the existing dialogue between the auditors and the regulators. Ultimately a balance needs to be struck between maintaining the highest level of quality without losing sight of the benefits that innovations can bring to traditional auditing models.

A key part of transforming the audit environment for the better will be achieved by sticking to the very basic quality control considerations embodied in professional standards. Auditors must make an assessment of whether the source of the audit evidence is up to standard. As part of this, auditors need to look forward towards the deployment of new innovative techniques with a rigorous quality control process.

Quality is a key issue, especially in times of change when new techniques and processes are altering the way an audit works. This is where another factor shaping the audit environment is becoming increasingly important. A Quality Management Approach (QMA) is starting to sweep across the industry. This approach recognises that certain building blocks need to be in place to satisfy quality standards. As part of this, an auditor can adjust and tailor its approach to quality control to match its specific client base. For example, an audit firm that has no clients in the insurance sector has no need for quality control procedures to ensure that its audit staff are appropriately trained in accounting standards specific to the insurance sector. This not only removes unnecessary barriers to innovation, but makes sure that clients receive the best service. At this stage, a QMA approach to quality control at the firm level is just being developed within the professional standards by IAASB task forces. Once this process is completed, firms will have confidence to fully flesh out their individual approaches.

In the future, a true QMA system will allow objectives, risks and responses to be scalable so that firms of all sizes are performing efficient high quality audits. Audit clients that require less receive less and audit clients that require more from their audit receive more in terms of time and resources. However, before this approach can be developed, the IAASB standards will need to be assessed, revised and issued so that an effective QMA approach becomes a finalised system for auditing. While these developments may seem like they are arriving in a flurry, businesses need hardly notice them as the onus is on firms to adapt and change so that they can deploy new techniques and processes. If the industry embraces the technological changes around new ways of applying that technology, companies will be better served.

Robert Dohrer is global leader – quality and risk at RSM International.

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