Re-imagining audit

The past year has been an intense year for the auditing profession, especially in the UK and the Netherlands. A series of events and discussions have suggested that auditors continue to not be doing their jobs right. Quite often, discussions about audit turn into gloomy debates, influenced by pessimistic arguments, focused on problems and obstacles. These have turned the conversations into a self-fulfilling prophecy.

Instead we really need to focus on rethinking our future aspirations and professional narratives that inspire fresh thinking about the opportunities ahead. AuditFutures has aimed to develop such a capacity for a proactive, critically futurist and self-reflective vision in a context that has largely focused elsewhere.

Earlier this year, the American Accounting Association held its annual conference under the “thinking anew” banner: looking for bold innovations towards a prosperous society. The event brought together over 3,000 academics and practitioners from the US and across the world. We were offered the opportunity to host a panel session as part of the plenary programme.

Our session once more created the space to step back and reflect on where the profession should be going – by offering various perspectives to challenge us to think differently about the future of audit. We engaged two highly respected accounting professors and journal editors- Robert Knechel (University of Florida) and Mark Peecher (University of Illinois) and two practicing auditors from the Bay area – Berhta Minnihan (audit partner from Moss Adams) and Wilmie Vosloo (audit manager from BDO).

Where our panel session succeeded was to connect directly with contemporary demands for education and training to stimulate more critical thinking, curiosity and commitment. Such discussions could certainly help to broaden the perspective of auditors beyond technical knowledge towards a deeper understanding of the public good. We are in a time where to be a vibrant, socially relevant profession demands not just vision but also empathy and strength of character. It means knowing what needs to be different. Talented people committed to building a better world are not going to be attracted to and inspired by a profession that privileges the routine and the mundane.

Is the future of audit about technology?

Robert Knechel argues that it does not matter what technology we are using – the future of audit would depend on the value proposition of audit. Technology is about process and it will certainly evolve but the future of audit depends on whether we can provide the economic value that market wants. “You can put blue-tooth, GPS and a back-up camera on a horse-driven buggy and it still not going to be the future of transportation”, argues Robert.  If we don’t have the right value proposition, the technology is just pieces of equipment or processes. Therefore, what we need to reflect on is what it means to be an auditing profession in today’s world.

What is the world like today?

“We are sitting in the middle of an information super highway” as Robert Knechel sees it. In his metaphor of 6-lane rush hour highway, information is flowing non-stop at high pace and one lane has a toll booth on it – one lane, the financial statement, has audit. All the other information is flying by us and we’re acting as it doesn’t exist. The problem here is not that we have a toll booth but that when the information gets to users, they cannot tell which is audited and which is not audited. It is uncertain that very many users look at actual regulatory or statutory filings. When you get your news through financial or information intermediaries, often this is lost. As the world move from 6 to 8 to 10 lanes, we should start thinking about the ecosystem in which the profession operates in. We are in an ecosystem with a lot of moving parts and a lot of players with different strategies and agendas. Audit is quite often asked to take responsibility for all of it.

What should be the value proposition of the profession?

Mark Peecher thinks that the future of value creation in assurance is where uncertainty is emerging in new kinds of decision-relevant information for stakeholders. Uncertainties surrounding valuable information will present different value propositions and likely different kinds of assertions. Related, technology itself is changing the expectations of what might constitute reasonable assurance for particular assertions, from society’s perspective. This comes with opportunities both with respect to providing higher degrees of assurance and more timely assurance. If society now wants more timely assurance on assertions and technology can enable it, we will have more firms venturing into new areas.

In articulating the long-term vision of the profession, Mark’s work suggests that skillful audit professionals could give more comfort to investors about their perceptions of the quality of management financial statements. He sees that not as a series of steps to go through to ensure financial statements meet the minimal hurdle of compliance with standards, but as a series of evidential gathering processes that lead to a positive opinion and a professional judgement about quality.  When the auditor has a time series of realizations of past financial-statement estimates as well as their own specialist-informed estimate for the current period, and both suggest management’s estimate is of high quality, investors want to know that.  But without auditor assurance, they will assume otherwise and price-protect.

Another interesting point raised was about the value of audit, perceived as limited to achieving the most reliable level of information, reducing transaction cost for management and lowering the cost of capital. This traditionally has put the theoretical ceiling on audit’s value. Mark’s own research show that investors incrementally value and express a willingness to pay more to own shares of firms who engage in cooperative behaviour.  One significant form of cooperative behaviour is providing transparent high quality reporting. What could add value to investors is auditors stepping up to provide opinion on whether the management is indeed doing that.

Auditing in a complex world

“You see the world though different lens when you are in practice and serve clients“ explains Bertha Minnihan. We live in a much more complex world and we are serving the public which is evolving. Audit of an auto dealership ten years ago is quite different from auditing a Tesla facility today. As clients are becoming more complex in the way in which they are operating, their internal controls and reporting are also quite complex.

Understanding the bigger picture and the complex environment of audit is key for Wilmie Woslo. The reality of the audit job is that it deals with a very complex world. In order to understand how information flows so we can audit it, we need to understand the underlying system. We need to understand how all this comes together. As a young auditor, Wilmie shared the concerns of her peers: “most of the people in my generation are interested in ways of doing things differently”. There are many parts of our work that we can automate and can do better and faster. However, only thinking beyond that will help us decide how to attract and retain talent in the profession.

Can we win the talent war?

The profession seem to bea talent war and individual firms cannot win it. Many companies and industries are competing for the same financial talent and we don’t have enough people going into accounting. Also, the way we work is not always connected with modern reality – some firms still require people to work only from offices.  Working from home is almost a must nowadays.

Another really important question that we discussed was work-life balance. This is really important for younger people as they are considering which profession they want to join. Some of the questions people are discussing are: Is money really important anymore? As we see more examples from the FIRE movement (Financially Independent, Retire Early) – would people want more free time (and when)?

How do we negotiate the value proposition of the profession?

The panel agreed that for some professions, like lawyers, the value proposition is quite clear. Most of the times, lawyers keep us out of trouble. The audit profession has not done well to articulate its value proposition. One reason could be that unlike some time ago, when the financial statement was enough to make decisions, today, investors are looking for so many things. For example cyber security is one of the biggest aspects that is not covered by the audit report. Is it a component that goes in our work – yes, of course. And, even though we don’t explicitly say whether a company is safe from one risk or another, we might have identified areas that could lead to that. Therefore, if we can provide a report on these issues, we should be able to articulate a different value for the profession.

When we think about what allows the auditors to earn a honourarirum for their work, it is the reputation for being trustworthy. This stems from being independent and to be competent. To the extend that you want to move into new assurance services – environmental, cyber, crypto, etc – or whether that is the providing of assurance on a continuous basis, you will have to hold this trust position.

Re-imagining audit

To reimagine what the profession does and how it does it requires a different mindset; a willingness to redesign audit. The task requires a design mindset. Design thinking proceeds quite differently to analytical thinking – the kind of thinking that has traditionally dominated professional training. It encourages deeper philosophical reflection over superficial pragmatism; it encourages cross-disciplinary analysis as a way of combating the constraints of silo-bound traditions and of identifying new goals. Its intent is to rethink assurance and audit services in ways that deliver a more satisfying and sustainable alignment between the profession’s identity, values and purpose and the ceo-system with which it operates.