Data Analytics Advances Make Auditors Smarter, More Effective

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By Laura Tieger Salisbury

Emerging data analytics technology promises to detect fraud or other accounting anomalies in financial statements much earlier, thus protecting investors and the capital markets.

Sampling of high risk audit areas may become obsolete as technological capacities expand to analyze huge amounts of data, possibly 100 percent of a client’s audits, with increased speed, accuracy and reliability.

The Public Company Accounting Oversight Board’s inspections staff currently use high risk as a criteria for deciding which audits to examine for deficiencies in the financial statements.

Dipalli Bhatt, of MindBridge Analyics Inc., told Bloomberg BNA Sept. 5 that her company’s auditor platform uses artificial intelligence and machine learning—where the program’s algorithms learn from how auditors use the data—to uncover material irregularities, either caused by humans or by an error.

Robin Grosset, previously the chief architect with IBM Watson’s Analytics group, is MindBridge’s chief technology officer. IBM Watson is a question-answering supercomputer from 2010 that uses artificial intelligence and data analytics software.

Globally Connected Audit Platform

Hermann Sidhu, of Ernst & Young LLP’s global assurance practice, told Bloomberg BNA Sept. 1 that his firm’s audit platform gives it huge advantages over competitors that rely on local servers on local personal computers rather than one globally connected platform.

EY has the only globally connected audit platform in the industry, Sidhu said. This platform, which cost more than $450 million to develop, connects EY’s entire global assurance practice across world, runs in real time and in 17 different languages, Sidhu added. All the data is stored in a private cloud in EY data centers.

Increased Chances of Detecting Fraud

The data analytics tool enhances the auditor’s judgment rather than replacing it, Jon Raphael, chief innovation officer for Deloitte LLP, said.

Technology “liberates the auditor to perform higher value analysis and insight vs. manual data input and reconciliation,” Raphael told Bloomberg BNA in a Sept. 21 email.

Deloitte uses cognitive technology to review contract terms and electronic documents to “understand and make a smart selection from huge amounts of data,” Raphael said.

Raphael said that Deloitte includes “data specialists on our audit teams who can take huge, disparate client and external data sets, and convert it into a picture that can accomplish the same objective—insights, needle in haystack (smart selection) and overall quality.”

Deloitte currently equips its auditors with a proprietary mobile app to run inventory counts in real–time, by scanning in the barcodes, and sending results back to the rest of the audit team.

Blockchain Problem: Trust

Blockchain’s internal validity by the parties to the transaction, without an intermediary, seems to reduce the need for an outside auditor to run procedures to verify the financial statements’ reliability

Blockchain is a digital ledger that tracks credits and debits by chaining cryptographically verified transactions into sequences of lists, known as blocks.

Despite the inherent trustworthiness of a digital ledger where transactions can’t be erased, the financial services industry, regulators, consumers, even peers in the network just don’t trust it yet, PricewaterhouseCooper LLPs’s Grainne McNamara told Bloomberg BNA Sept. 1.

McNamara said the technology hasn’t got to the “trust tipping point” that leads to broad adoption of a new technology. “It is beyond safe,” she said. “It could drastically improve security and transparency.”

Integrity of Financial Records

PwC is moving ahead, despite the lack of regulation, with a proprietary PwC Blockchain continuous audit solution. McNamara said. The technology allows the auditor to become a node in the network.

“The software captures data from our customer’s Blockchain infrastructure and applies audit rule-based logic to execute testing and reporting for internal audit departments,” PwC’s Adam Locklin told Bloomberg BNA in an email Sept. 21.

The Securities and Exchange Commission and the PCAOB haven’t made up their minds about regulating Blockchain.

Steven Harris, PCAOB member, asked the auditing section of the American Accounting Association April 20 to consider whether Blockchain will “call into question the need for an audit.”

“The verification of the transaction by parties purportedly assures the integrity of the financial records, and some believe, may reduce or eliminate the need for audits in the future,” Harris said.

Concern for the investor and for smaller firms were paramount in Harris’s concerns about the evolving role of technology in auditing.

Cloud Technology Lets Small Firms Compete

Committing and investing in technologies requires a radical shift in approach that many CPAs still lack, Jody Padar, CEO of New Vision CPA Group and author of The Radical CPA, told Bloomberg BNA Sept. 1.

Padar—whose firm has only a handful of CPAs—said that cloud technology lets her compete with global firms. She is disturbed by the statistic that “fewer than 10 percent of CPAs are 100 percent cloud-driven.”

Technology by itself is not the disruption to accounting and auditing practice, rather “being available in real-time is the disruption,” Padar said.

Unlike the Big Four, most CPAs don’t have the budget to invest in proprietary technology. Nor do they need to, Padar said, i. But they do need to invest in scalable technology that meets their clients’ needs—to improve the speed, quality and streamlining of their services.

To contact the reporter on this story: Laura Tieger Salisbury in Washington at LSalisbury@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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