AuditFutures hosted the Audit Collaboratory to explore the importance of collaboration and provided firms the opportunity to learn from one another by sharing knowledge and experience. The first session discussed the practical areas where all firms could perform better and could collaborate and share knowledge instead of competing. The two salient topics of discussion were the need for an Audit Firms Tech Forum (which is not set up and has regular meetings at ICAEW) and the opportunities for open innovation.
Innovation is, at its core, a matter of culture. In order to innovate accounting practices, culture and institutional structure are of particular concern and importance. If we are to build capabilities that facilitate conditions for innovation and improvement of practice we need to interrogate the intrinsic cultural values and institutional foundations that makes up accounting practice. To develop a deeper understanding of professional culture, we need to consider the existing challenges, conflicts and barriers within modern firms, which make such innovation more challenging.
The rise of AI and data analytics (and the associated threats of automation) have already resulted in significant investment, at the organisational level, in rethinking the value of services, the effectiveness of their structure and the professional skills and capabilities required of the future workforce. However, there has been little systematic thought about the effects of such automation on the profession as a whole, or the normative question of how such technologies should be adopted.
The promise of data analytics and machine learning has also captured the imagination of many firms to the extent that such approaches are expected to transform the audit business in the near future. It is also expected that it will have a major impact on other areas of accounting, advisory and technology services, particularly through a transformation of the workforce and skills profile of the profession. Whilst accepted rhetoric within the profession places the emphasis on technology as a key factor of innovation, this view might be restrictive and might not articulate a clear understanding of purpose and function that is defined around a professional context.
It is commonly accepted that the wider adoption of AI will radically transform the professional services, creating a ‘skills and knowledge vacuum’ – partner skills at the top and new entrants at the bottom of the pyramid. However, the application of AI in professions like accounting and law is not a simple proposition. Firms are heavily regulated, served by a narrow range of technology providers, and traditionally conservative.
From an innovation management perspective, it is interesting to think about how might we create the professional and leadership conditions to enable effective and ethical adoption of AI in professional services. The concern for a number of professions and innovation management practices is that when applied in this context, it could help develop deep contextual understanding and support meaningful impact and change in the profession.
Another dimension of innovation strategy is about breaking silos in large firms. As corporations grow bigger and diversify their service lines, knowledge sharing, knowledge transfer and innovation capacities might become more difficult.
Another challenge for the development and adoption of AI in professional services is the polar opposite of the values of innovation in professions like accountancy and in sectors like technology. By design, accountancy is about accuracy, assurance, and mitigation of risk. This is opposite of how technology is being developed – high risk, low emphasis on accuracy, and predominant focus on efficiency in short terms time-frames. Therefore, any innovation strategies that seek to innovate a firm in this sector might prove unfeasible as the values of people creating them are incompatible.
Therefore, for a strategy to be successful, it would need to have a normative component and to recognise the complexity of the profession by adopting a wholistic and informed approach to solving problems. In other words, in explaining rationale and approach, it needs to demonstrate why other approaches (that focus on individual solutions) might not deliver the long-term and sustainable transformation for the sector.
Open innovation as a management approach to innovation has become quite popular in the past two decades. It allowed management to shift focus from internal R&D to external engagement as a way to develop new products and services and as a way to demonstrate and create value to stakeholders. It has allowed researchers and scholars to enrich their conceptual understanding and terminology used within management strategy. As Henry Chesbrough describes in his seminal ‘Open Innovation’ book, the proliferation of numerous books, peer-reviewed papers and policy reports, further re-aligned government, industry and sector innovation frameworks towards open innovation approaches.
The basic idea of open innovation challenges the fundamental hierarchical pyramid structure of professional services firms. In a traditional firm, the flow of ideas, knowledge and decision flows vertically and most of the management strategies are driven by vertical integration. One of the main challenges that are not often discussed in the management literature, is that sectors like accountancy, for example, the pyramid is quite flat and the ratio of employees in the lower parts to the equity partners is extremely high. Open innovation, in this context, does not require firms to abandon this structure (which is impossible without wider change in the ecosystem of professional services firms) but to augment the traditional innovation practices with inbound sourcing of external knowledge.
Open source originated in software companies where the traditional mode of thinking was that ‘code is gold’. It is the one thing that a company would preciously safeguard because this is how it makes money. It might prove valuable for professional services to understand the software companies movement to an open source paradigm where code is available to anyone (with the right set of people) do whatever they want with it.
What is important to learn more about this movement is the environment in which open source is created. Very rarely projects are about groups of people randomly self-organising around the world to rapidly develop a new product or service. Instead, quite often when a project is being set up, it has it own infrastructure and rules, from which appropriate norms and governance are created. Also, before anyone can commit to providing code to a project, there is a special set of procedures and processes that are followed. Usually, there is a technical board or committee that governs all this process.
For many traditional companies, it is quite difficult to grasp what is the business model for giving away something that you normally should be making money from. However, more and more companies and sectors are unlearning.
What has happened with the software development community in the late 1990s is that the best people, even those who worked in the big companies, were joining different projects in their own time. They were collaborating with others (and competing to be the first to solve a problem) in areas where not a single company but a diverse community of people were interested and working to solve that problem. These people were bouncing ideas off each other and of course, there were kudos for those who solved the problem.
This style of working came with its own pace and cost efficiencies that you could not get in a traditional environment. Companies realised that their talented staff were participating in these projects for free and the their contribution was very useful. So there was a gradual shift in many companies to provide freedom to staff to participate in project (and often even represent their own company). This allowed to corporations to preserve some level of control while not suffocating their best people.
This was a big shift in the way tech companies worked and software was created. The clever and forward looking companies realised that their people wanted to participate in these collaborative projects and the results of these collaborations has benefit and value for the tech companies as well. If we look at the open source communities today, rarely we can find people who are not paid.
Against the backdrop of recent public scrutiny of the audit profession, open innovation could offer a new approach to rethinking the future of that profession in the context of disruptive technologies like AI. The audit sector is perceived as being in a state of stagnation and has a poor public image, with a lot of attention paid to perceived audit failures, and almost no discussion of the positive role audit has played in maintaining trust in business. The ongoing investigations in the sector add to this perception but do little to educate the public on the role, scope and benefits of auditing.
At the same time, the practice of audit looks set for major changes thanks to the rapid development of technology in finance, data analysis and artificial intelligence. Whilst these developments hold great promise, their adoption risks being held back by a lack of technology maturity on the client side, a lack of widely recognised data and technology standards, plus the high cost of development that means only the largest firms are currently able to create their own systems and tools.
While there could be many areas where new innovation strategies are needed, open innovation could drive a genuine desire among firms at all levels of the profession to collaborate around audit data standards and technology development. Such specific and tangible problems could have a good win-win proposition to help accelerate the development of shared data and technology standards in audit, and improve audit quality through big data analysis, whilst also contributing positively to the public image of the practice.
First, by contributing anonymised historical data for meta-analysis, it will be possible to tell a positive public story about how audit succeeds more often than it fails, and to better identify patterns that are associated with potential problems to improve audit practice. This is the first area in which intra-firm collaboration can help the sector as a whole.
Second, building on this initial collaboration, there is potential to assist the firms in developing common data sharing standards and protocols that will be helpful in the development of audit data technologies and tools further down the road.
Ultimately, if this initiative can build confidence and trust between the firms, there is a strong rationale for creating an open source technology project to accelerate development and adoption of the basic commodity building blocks of audit platforms. Reducing development costs for the profession as a whole, whilst enabling much wider adoption of technology created by pioneering firms, this would not reduce any firm’s individual competitive advantage by focusing on common components rather than how they are assembled into specialised platforms. There are several examples from the open source software field where this approach has worked well and accelerated innovation for all member firms and where firms can collaborate yet remain competitive in a similar fashion to the OpenStack Foundation membership.
Many firms with audit practices already have active innovation and technology teams that are willing and able to move forward with a collaboration that could improve audit as a whole. This would demonstrate collaboration and commitment to improvement and in this way help to improve the sector’s public image in the immediate term.