Audit: automate or innovate?

By Fiona Czerniawska.

You don’t need a crystal ball these days to prophesy the death of the conventional audit process. Just about anyone who can scrape some tea leaves together has looked into their cups and seen the future: the people-less audit has become the expectation du jour.

In our latest research we found that 99% of US executives think that digital technology will change the audit process to some extent, accelerated not by the regulator, audit firms, or even clients, but by the pace of technology change itself. So the question isn’t so much when, let alone if, but how. It turns out that clients see two distinct opportunities: the replacement of the routine checks that make up such a large proportion of the effort involved in an audit by robotic process automation; and the enhancement through artificial intelligence of the type of analysis audit firms can perform, based on the data they’ve gathered during the audit. It’s the latter that clients are most interested in, but they’re concerned that consulting firms will prioritise the former. And a lot of signs emerging from the supply side suggest that they’re right.

Are audit firms misreading the market? In such a regulated industry, winning work based on a distinctive approach or outstanding quality of service is incredibly hard: being able to deliver the same audit for less than your competitors has to be tempting, with the short-term gains trumping concerns of a long-term race to the pricing bottom. But the technology itself has to be part of the problem. Automation is an awful lot easier to do than innovation, and audit firms, almost completely lacking a heritage of investment in leading-edge software, may simply be taking the path of least resistance.

But audit firms may come to regret taking the easier option. As they automate the low-cost areas of audit, then it’s quite obvious that audit firms will face competition from technology companies, which are willing to hoover up the routine process work while steering well clear of anything that smacks of an audit opinion. No one, not even the most foolhardy of technology behemoths, would voluntarily hobble their businesses with the regulatory liabilities involved. Instead, they’ll aim to draw a neat line separating their role from that of a statutory auditor, leaving the latter with all of the responsibility but very little of the fees. In this scenario, it would be possible for an audit firm to comfort itself that new technology will increase the firm’s ability to deliver added-value insights, and that the high fee rates typically commanded by this kind of work will offset the loss of other income. But if the audit firm hasn’t invested in the high-value technology–artificial intelligence and the like– to improve the quality of its insights, it may find itself unable to exploit this market either. Other kinds of technology firms, perhaps smaller and more specialised ones, may have stepped smartly into the gap.

Unless they’re prepared to take innovation just as seriously as automation, audit firms could find themselves locked out of two lucrative markets, and left with nothing more than the audit opinion to focus on.

For more information on our report about audit, click here.