In the spotlight: High-Performing Organisations
In the wake of digital transformation there’s been a huge explosion in demand for cost-efficiency, greater security and transparency, and fact-based decision-making. This is forcing companies to realign their financial function, and revolutionising auditing – both of which are now expected to make a better-quality and more useful contribution. CFOs and auditors are morphing from backward-looking guardians of quality to data agents.
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Partner, Head of Technology-driven Audit, PwC Switzerland
Digitalisation is a bit like the invention of the wheel, which took people into a whole new dimension of space, time and speed, and revolutionised the concept of mobility. We used to get around on foot or on horseback. Now we’re travelling at the speed of cars, trains and planes, all over the globe. Similarly, auditors used to be experts who decided whether financial statements were correct and complete, mostly on the basis of samples. Now that figures and transactions are digitised, connected and automated, a large part of the resource-intensive manual work is no longer required. The volume of data that can be verified at the click of a mouse has got infinitely larger and more informative. We believe it’s now crucial for the financial function and the auditor to be aligned and coordinated.
The wheels of a company’s internal financial function and the external audit have to run in parallel (see also Audit 4.0, Part 1, Finance functions and processes). Driven by the need for cost-efficiency, security, transparency and fact-based decision-making, companies are making themselves part of digital information ecosystems where they’re connected with customers, suppliers, authorities, banks and financial markets, all sharing data and information rapidly on an automated basis. This is leading to an explosion in data volumes and forcing participants to adapt their processes, controls, structures and corporate governance systems accordingly – the only way of generating, analysing and making proper use of the necessary data (see Figure 1).
The result is significant changes both in the audit and within organisations. They include:
the introduction of group-wide, standardised enterprise resource planning (ERP) systems such as SAP Hana
automation such as robotic process automation (RPA) and the use of machine learning and artificial intelligence (AI)
the introduction and expansion of shared service centres (SSCs).
The potential for auditors depends on the available data, IT landscapes and applications at the company they’re auditing. In an SAP environment, a great deal is possible in terms of the technological progress enabled by digitalisation. Even heterogeneous and less widespread ERP applications allow the benefits of digitalisation to be harnessed, although in these cases more effort is involved.
We are currently working with digital toolboxes, so-called algorithm suites, with tools working on four levels:
1. Processes: Algorithms visualise business processes such as order to cash, purchase to pay, inventories or staff levels in the form of flow charts that make things like deviations from the template, duplication and repetition visible. This reveals the potential of more thoroughgoing automation and standardisation to boost process efficiency.
2. Controls: With the help of algorithms it’s possible to verify, on an automated basis, the effectiveness of the control design and the controls themselves and identify ways of optimising the system of internal controls. This helps reveal the potential of automation and standardisation in terms of enhancing risk management.
3. Transactions: These days auditors have access to a comprehensive portfolio of algorithms designed and programmed according to risk-relevant rules (hypotheses). Auditors analyse data to try and identify anomalies in the processing of transactions and entries, for example in sales or buying, and calculate financial indicators. Up to 100 per cent of the population of audit areas can be checked in different dimensions.
4. Workflow management: Workflow and process management tools provide support when it comes to communicating with clients and within group-wide audits. This digital networking on shared work platforms creates transparency and facilitates short response times, effective project management and the efficient handling of work documentation.
Digital audits have numerous benefits (Figure 2) and enhance the value contributed by the auditor (Figure 3). The goal has to be to use digital audit tools in such a way that in addition to meeting their statutory obligations, auditors can pave the way for transforming the financial function into a driver of business performance.
RPA has a huge and easily exploitable potential in terms of the financial function. RPA takes care of recurring business, computing and administrative processes on a fully automated basis without having to modify existing IT structures. RPA can be set up for a fairly modest investment, and is likely to be audit-relevant as early as 2018.
A prerequisite for RPA is a systematically monitored governance and control environment. Audits will concentrate on the system of internal controls along the relevant risk categories, checking to see whether the governance, control system and the way controls are carried out address risk appropriately.
We are currently piloting this technology, also for internal use. RPA can automate manual steps in the documentation chain between local subsidiaries and local auditors, all the way to the group auditor and its central documentation duties. This makes administrative and less productive processes more efficient.
In the near future, companies’ transactions, from electronic orders to payment, will be processed in a closed IT environment. Everything will be executed on the basis of data and logged accordingly. This will mean the audit will be done with automated software in real time, in other words on a continuous basis. The auditor will accompany this automated transaction processing.
In essence, artificial intelligence is a chain of algorithms used by software to process information, similar to the way human intelligence processes information. Machine learning refers to the artificial, computer-based creation of knowledge on the basis of the machine’s experience. It recognises patterns and regularities in the data fed in, becoming more and more intelligent in the process, and able to assign new data to familiar regularities. From the audit point of view this is set to significantly improve the identification of anomalies and enable trends and tendencies (e.g. in impairment testing or project evaluation) to be simulated. Auditors will be able to compare information with the client’s financial and other documentation and get an even better understanding of the risks.
Benchmarking is already used on a selective basis as part of the audit of many companies. Digitalisation will make this kind of comparison more systematic and all-encompassing. Auditors will be able to compare and evaluate data on their clients’ processes, controls, financial and business indicators efficiently and comprehensively – thus becoming data agents or knowledge carriers whose experience and expertise is enriched with the addition of broad, data-based knowledge, to the benefit of the entities they audit.
It is still not clear precisely what the financial reporting of the future will look like. For the time being the debate will revolve around the balance sheet, profit and loss and cash flow statements, and other classic financial indicators. Further into the future, new indicators such as customer satisfaction, inventory levels and payment patterns will become relevant. With volumes of data burgeoning, all stakeholders have a broader selection of information to choose from. The scope of the audit, the granularity of audit certainty and the periodicity of the audit will all have to be redefined. It’s clear that the audit requirement will have to be adapted and probably extended.
What’s needed in the current torrent of data and information is transparency, security and fact-based decision-making. We are convinced that the recipients of financial and business information want more and more reliable, audited information. They need a high-quality, error-free basis for making decisions. Auditors have to focus on the changing needs of their clients and adapt their approach accordingly.
Audit standards also have to be given a rethink. The current standards originate from a pre-digital age. While the International Standards on Auditing (ISA) don’t prohibit the use of data analytics per se, the existing standards don’t exactly encourage it either. This means auditors are torn between the market’s call for digital audits and conventional audits based on sampling. The International Auditing and Assurance Standards Board (IAASB) is currently evaluating whether the ISA still meet the needs of stakeholders. Here, too, fundamental change is afoot.
The development we’ve outlined will require substantial investment in people and digital tools. Digitalisation is raising both hopes and fears among employees. It’s up to leaders to support and guide them on this digital journey with training, project responsibility, debate on the principles, clear goals and open dialogue. This is the only way of unleashing the innovatory potential of a motivated audit team.
It’s our conviction that the financial function and the auditors will have to make much of this digital journey hand in hand. There are commonalities and dependencies. Auditors must have a detailed understanding of the financial function’s goals and priorities to apply their approach and the right tools from their digital toolbox. An audit team of experts in digital, systems and process assurance and auditors will thus help pave the way for the digital transformation of the finance function. Only by taking the reins of digital transformation actively and courageously will it be possible to harness the potential that exists for the financial function and the audit to achieve an outstanding performance.