Digitize Data: Be Audit Ready for Revenue Recognition or Leasing Changes
“Once data is digital it becomes easier to transfer, access, and make it mobile giving auditors the ability to assess risk differently--seeing trends and things going on in the clients business that would normally have taken a more detailed understanding to uncover. Most importantly once you create a digital record of something, it opens it up to advanced analytics” said Will Bible, Audit Partner with Deloitte focusing on audit transformation and innovation during a phone conversation with Bloomberg Tax.
“The overall objective of an audit is to provide reasonable assurance that the financial statements are free from material misstatements. Technology allows auditors in some cases to look at the full population versus testing samples, which provides more certainty to the audit opinion,” Bible said. Ultimately, “you have a better understanding of the business you are auditing, which allows for better conversations with the clients, and reduces the unnecessary friction of exchanging documents and information. Auditors are able to step back and visualize information in a different way, allowing for less potential of operational error.”
How is that accomplished when corporations have more paperwork and documentation than most professional service firms could read, analyze, or audit in a lifetime? The new revenue rules (ASC 606) for example, requires companies to re-examine virtually every contract with customers, or the new leasing rules (ASC 842) requires the re-examination and classification of every leased asset across an organization. Many of these documents may have been signed before digital documentation existed, or they exist simply as a PDF file on a company server. The most prudent auditor, regulator, and investor ought to be wondering what companies are doing to comply, and what test procedures auditors will use.
The answer lies partially in going digital. “Many companies have undergone the process to digitize themselves, to derive and capture value from improved business practices. For example they see the benefits of having new front end systems that can instantly digitize and record information that can easily be managed and integrated with their existing ERP systems. They are not necessarily doing this for the benefit of the auditors” said Bible.
Complying with the lease accounting standards requires collecting a lot of documents. For example, a case study on Cummins inc. showed that they had over 7,400 leases after analyzing all leased assets, nearly 5,000 more than expected. "Depending on the maturity of the organization and how the organization is maintaining those documents overtime, there may have been an effort up front to digitize, or collect in one place all the different leases across the organization. To accomplish this, some companies used extraction technology, while others are throwing more people at it. However, with leasing, there is a vibrant market for hiring consultants and vendors" noted Bible. “Some companies are developing some in house solutions, but the necessity for ongoing tracking and maintenance requires specific built systems to meet those requirements.”
Future Technology for Auditors and Accountants to Consider
“Many companies are undergoing experiments to understand how distributed ledgers, or blockchain could enable better business practices and that could have interesting ramifications with impacts to the audit process to the extent that it affects financial reporting,” said Bible. Additionally, artificial intelligence (AI) is being used by Microsoft, IBM, Dow and more to “rake in efficiency gains” according to Bloomberg Tax. Expect for AI to play an ever increasing roll in the accounting and audit profession.
From the audit side, firms are experimenting with things like remote imaging technology and using drones to conduct certain kinds of inventory calculations. For example, an auditor of a large scale farm can instantly count the number of cattle from an aerial view without herding the group together for a head count. The introduction of mobile device technology in the audit process gives the auditor the ability to quickly scan barcodes and instantly input the necessary data into a depository. These are just a couple of examples of how innovation and technology is being used to increase the efficiency and effectiveness of companies and their auditors alike.
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