An anxious student recently appeared at my office door. He was considering not applying to the master’s of accounting program; a professor elsewhere in the business school had told him accountants would be obsolete within a matter of years.
My immediate reaction was to laugh, but I quickly stifled that impulse when I saw real concern on his face. I walked him through the fatal flaws of this conjecture, and I believe I successfully convinced him to continue his accounting studies.
Nevertheless, the incident got me thinking about the “audit of the future” — in particular, the role of the audit professional in a rapidly changing technological environment. This topic generates considerable attention, but discussions to date have been mostly high-level and aspirational. Big accounting firms and business journalists use common buzzwords: data analytics, big data and — the newest addition to the nomenclature — blockchain. No one seems to know when or how “blockchain” will change everything, but everyone is convinced it will. (A blockchain, for the uninitiated, is a decentralized database or distributed ledger that records “blocks,” or data records, across multiple computers, reducing the risk of tampering or hacking.)
Take this recent article from Accounting Today. A very credible panel assembled to discuss the audit of the future. Lots of blockchain and big data talk ensued. For example, three different roundtable participants mentioned that, in the future, instead of using sampling techniques, auditors would be able to test 100 percent of a data set. That’s a popular response to the question, “How will auditors use data analytics in the audit of the future?” However, an accountant with good auditing and analytic skills (i.e., judgment) will have to decide how to handle the many exceptions or outliers that will inevitably result from “100 percent of data” computer number-crunching (ironically, probably through the use of sampling).
I agree that continued advances in technology will change the audit process, as well as the skill sets required of future auditors. But that’s not anything new. One of Accounting Today’s roundtable experts stated that “auditors must embrace new technologies.” No argument there, but auditors have been doing that for a long time. When books and records were first converted to computers, accountants and auditors had to develop and test IT controls. Later, audit documentation was converted from paper to digital form. The process was difficult and ugly, but the transition was successfully made. And, since day one, auditors have used various forms of data analytics.
Technology always changes, and auditors adapt. Big data, data analytics and, yes, even blockchain are simply the latest changes.
So, what does the audit of the future look like, and what is the role of the accountant/auditor?
An audit is about providing confidence to shareholders and other stakeholders based on trust. Governmental and commercial requirements for assurance services on information critical to investor/stakeholder decision-making will not go away — and will expand. The fundamental elements of delivering that confidence include independence in fact, professional skepticism, sound judgment, and courage. Each is a human characteristic that must continually be taught and demonstrated by the experienced professionals who have gone before. These are the important things that will never change. So what will?
It’s the umbrella term for various components of information beyond historical financial information relevant to investors and other stakeholders. Also known as Environmental, Social and Governance (ESG) reporting, or the “triple bottom line” of 1) economic viability, 2) social responsibility, and 3) environmental responsibility.
Strategy reporting is encompassed by the concept. Sustainability might be the auditing profession’s huge growth opportunity in the future. Currently, sustainability reporting is voluntary in the U.S. and many other countries, but stakeholder demand is growing significantly. One high-profile organization, the forward-looking Sustainability Accounting Standards Board (SASB), has been rapidly developing and publishing sustainability accounting standards. (Note the similarity — FASB and SASB.) Although no regulator currently mandates adoption of specific sustainability accounting standards, the SASB is positioning itself to be the go-to standard-setter if mandatory reporting becomes a reality, something the right president and Congress could make happen quickly. Auditors will be ready and willing to provide assurance services on mandatory sustainability reporting. Big 4 accounting firms are already supporting the SASB with dollars and cooperation.
As financial reporting standards move from historical cost basis accounting to fair value, demand for valuation services increases. The valuation profession continues to develop professional frameworks, standards, and credentialing processes. Valuation services are exercises in professional judgment. For example, purchase price allocation in an acquisition is a common valuation service well-suited to the accounting professional’s enhanced training and experience.
Companies increasingly complain that traditional generally accepted accounting principles do not properly reflect the true picture of their operating results, so they calculate and publish financial metrics not defined by GAAP. These metrics include various measures of performance, such as cash flow (EBITDA and adjusted EBIDA) and even “adjusted revenue.” Currently, auditors don’t provide assurance on non-GAAP metrics, but they will likely be required to do so in the future. Include other non-historical financial information, such as management discussion and analysis, and you have another high-growth practice area.
Accounting Advisory Services
Generally accepted accounting principles are getting more complex in response to a changing global business environment and the trend toward fair value reporting. Independent accounting firms play an expanding role in advising clients and non-clients on new standards (massive new standards on revenue recognition and leasing are prime examples).
It’s the ultimate hot button auditing firm service. The giant firms have rebuilt their consulting practices at a high growth rate in the years following the chaos caused by watershed restrictions imposed under the Sarbanes-Oxley Act of 2002 (SARBOX). This high growth trend is likely to continue, representing huge opportunities for accountants now and in the future. The looming question is whether the profession’s regulator, the Public Company Accounting Oversight Board (PCAOB), will take further action to dismantle, or at least discourage, consulting by audit firms. A causal link between consulting for audit clients and audit failures in major accounting scandals in the years leading up to SARBOX is more inferred than directly proven. Notwithstanding the tenuous link, the inference was enough for SARBOX to include significant prohibitions on many consulting services previously provided to audit clients.
As a result, large firms turned their focus to providing new permitted consulting services to audit clients and all types of services to non-audit clients. Additional restrictions would likely be aimed at limiting public accounting practices to audit or audit- and tax-only practices (i.e., no consulting). However, such a major disruptive move by the PCAOB is unlikely, unless another series of audit failures opens the door to opportunistic restrictions. One argument for auditing firm consulting practices is that the firm’s relevant consulting expertise improves the quality of the audit practice. Consider cybersecurity, an area in which consulting expertise is increasingly needed by nearly all companies (and that represents a huge growth opportunity for auditors). It makes sense that the firm’s consulting-related cybersecurity expertise could improve the quality of an IT internal controls evaluation performed as part of an integrated audit.
The list of current and future value-added services by CPAs is long and growing. The global economy and the regulatory and business environments will continue to evolve, and the accounting and auditing industries will evolve in response; artificial intelligence and automation won’t make them obsolete but rather enhance their effectiveness. It’s an evolution, not a revolution.
For those pursuing careers in accounting and auditing, the future is big and exciting, and we can prepare you for it. What we need from you are the irreplaceable human characteristics of independence, judgment, professional skepticism and, most of all, the courage to do the right thing.
About the Author
This article was written by Jeff Johans of Texas Enterprise. Jeff Johanns is an accounting lecturer at the McCombs School of Business. He is a former U.S. Assurance Risk Management Leader at PricewaterhouseCoopers LLP and is a Certified Public Accountant licensed in Texas with more than 30 years of experience in public accounting and private industry.