Accountancy Age Feature: Leaving paper behind

While the role of the regulators has grabbed the headlines in the past few weeks for the way they appear to be determining the fate of the auditing profession, history will probably decide that the Securities and Exchange Commission ? or another government agency ? was not as influential as information technology in deciding how auditors carry out their work, and the type of assignments the marketplace asks them to perform.

The past two decades have seen a revolution in the way audits are carried out as computerised accounts have taken over from manual records in virtually every business. But this could be seen to be just the tip of the iceberg if the predictions about the extent and the role of e-commerce become a reality.

Even without the immense change which the internet is bringing to the auditing profession, the scale of changes to company books and records through the proper exploitation of financial modelling and knowledge-based systems technologies will mean that the audit of the 1990s could quickly come to be viewed as quaint and old-fashioned as quill pens and comptometers.

Martyn Jones, national audit technical partner at Deloitte & Touche, says the main impact IT is making is on the auditors? ability to gain knowledge: ?Today it is possible to gain much more knowledge about the company and its place in its sector.? This is not the good news you might assume. Jones says: ?There is far more information available than you can possibly hope to be aware of. As a result we are now in the middle of a debate over what is relevant to the audit.?

The key relevance, as far as Jones is concerned, is that the business environment in which clients operate can no longer be taken for granted ? whole sectors are under challenge with pressure for consolidation and convergence. Jones continues: ?Auditors are not impervious to that change, the sheer pace of change has an impact on risk.?

Up until now, it could be argued that auditors and auditing have kept pace with, and even welcomed, technologically driven changes. Danielle Stewart is a partner in fast-growing London partnership Warrener Stewart. Over the past couple of years she has been encouraging fellow auditors to take advantage of the opportunity that technology has given to the audit of family-owned companies. She says there are two strands to the continuing impact of IT on the audit, both of which are fundamental.

In the first instance the proliferation of proprietary accounting software programmes has meant that the audit approach has been altered. Auditors can place reliance on the quality of controls and the accuracy of the transactions and so can make much greater use of analytical procedures. This systems-based audit means, according to Stewart, that the audit is becoming more useful and more about adding value.

It is perhaps not surprising that the second fundamental change brought about by IT is the removal of some of the traditional drudgery in the audit. Stewart says: ?We now have computer-produced audit programmes to help us perform the audit and that has taken out much of the drudgery.?

For those who left auditing a few years ago, it is a sobering thought that audit programmes are not being amended by careful rubbings out. Instead, at the touch of a button, a brand new schedule is produced down to the automatic preening of the client name, the date and the schedule references. In fact, Stewart is such a convert to the technologically-based audit that she is arguing that an auditor could not comply with the Auditing Practices Board?s recently produced draft standard on quality unless the audit was IT-based.

But while some argue such technological advances save auditors time and hence the client money, others argue that the mindless disgorging of standard audit programmes can be as dangerous as the mindless rubbing out by the trainees of yesteryear.

Clive Jones is a partner with Clifford Roberts, a six-partner firm with four offices in the Midlands. He admits his firm could make greater use of technology but argues that merely printing off the schedule ?takes away the thought?. But he adds: ?Client computerisation can make a heck of a difference. The routine work of verifying transactions will go and instead, much of the audit is going to move to senior staff who are able to think rather than just go through a procedure.?

But while computerisation may help the audit become more of a thinking man?s game, Clive Jones also argues that such technological advances can have the opposite impact on the clients. While it may be possible for any company with a PC to produce a set of management information using relativity low-cost accounting software, there is no guarantee that the output will be true and fair. Clive Jones says: ?We all know clients who can produce pretty rubbishy management accounts and yet they then think they can produce a set of [statutory] accounts. But they simply don?t understand the year-end stuff.?

At the moment, the auditor will right the errors of all but the smallest clients. But if the audit threshold zooms up into the millions from its present £350,000, no such adjustment will necessarily be made. Wherever the audit threshold eventually ends up, the takeover of audit by IT is set to continue. Indeed one set of clear winners from the impact of the digital revolution on audit ? like in so many other walks of life ? are software and hardware manufacturers.

A laptop has been de-rigeur in some firms for a number of years, and even the late adaptors know that soon, the auditor turning up without a laptop will be as unthinkable as a counterpart of a few years ago turning up at the client?s offices without a full range of coloured pens for ticking and bashing. The only difference is that computers cost more than variety packs of Bics.

David Chitty, a partner with DFK Chantrey Vellacott, argues the strain of kitting out every auditor with a laptop, which will probably only last around 18 months, is considerable for some partnerships. At today?s laptop prices a firm of 100 professionals could be investing nearly £1.5m a year with its friendly PC supplier. Or as Chitty puts it: ?It?s not inconceivable that up to 10% of [a firm?s] cashflow could be going on kit.?

The only good news is that these laptops are capable of doing more than just printing off pretty audit programmes. The bigger audit firms, at least, are starting to use their computers to interrogate their clients? computers. As company?s financial systems are becoming more sophisticated and more ubiquitous it is no longer enough for auditors to take the approach of auditing ?around the black box?. These days they have to make an effort to find out what is actually happening inside the box, especially when the box contains data on e-commerce.

As Roger Housechild, head of the English ICA?s Audit Faculty and a former partner of a major international firm, puts it: ?If the projected growth in e-commerce actually takes place, the auditor will find himself dealing with electronic blips, not pieces of paper, in more and more situations. That means audit is becoming more orientated towards the systems that proves the transaction as much as the transactions themselves.?

Audit over the past few years has become much more focussed on risks and on controls. Auditors now have to understand systems and why they fall over. But at the same time auditors need to restrain themselves from being overawed by IT systems.

Whether we are entering a digital age or not, auditors need to maintain ? or perhaps even rediscover ? their professional scepticism. Housechild says: ?We have to overcome the innate belief that if a computer did it, it must be right. We all know people like Leeson got around the system.? It seems inevitable that auditors will come under increasing pressure both to audit complex IT systems and do so quickly. Over the past few years, more quoted companies have been getting their auditors to come up with their opinion quickly in order to tell the market the latest financial position as soon as possible.

With the dawning of the internet age there is nothing to stop companies frequently ? monthly, even weekly ? publishing financial information on the internet. If investors are to have confidence in those announcements it seems inevitable some sort of audit would be necessary. Such an audit could not be done by auditors pitching up at the client?s office to mooch around for a few weeks. Housechild says: ?You can conceive of the idea where added to the auditors? tool kit is the ability to plug your PC into the client?s system and interrogate it online.?

The accountancy profession has already moved rapidly towards tax call centres. The next few years could see the start of audit call centres where auditors would be able to constantly check and perform transaction testing without leaving the office or moving away from the screen.

• Peter Williams is a freelance writer and director of Kato Publishing