Addressing the FRC’s audit quality review with technology
No-one could deny that 2020 was a turbulent and disruptive year for the audit sector. The audit sector went on trial both figuratively and physically with strong evidence continuing to stack up against the industry in the shape of widely publicised accounting scandals of company’s such as Carillion and Patisserie Valerie. Article after article illustrated the public’s growing disillusionment and calls from regulators for audit reform strengthened. All this noise has collectively supported the case for a much more urgent shake-up of the audit sector.
November 2020 saw The Financial Reporting Council’s (FRC) report, ‘Developments in Audit’, into the state of the profession, label audit quality as ‘unacceptably inconsistent’. Their annual review described 2020 as the year that ‘challenged the resilience of the audit firms both financially and operationally’ and identified the following key issues facing the audit sector:
- Inconsistent audit quality
- Audit market health and resilience
- Covid-19 pandemic
So, how can audit firms best addresses these challenges?
The audit sector stands at the pinnacle of a period of intense and broad-reaching change which must be driven by increased digitisation and better access to client data. Now, ahead of the imminent release of the department for Business, Energy & Industrial Strategy’s (BEIS) whitepaper on audit reform, we examine how technologies, like Engine B, can help to tackle the pressing issues discussed in the FRC’s audit report.
FRC Audit Review: Inconsistent audit quality
“49 out of the 130 audits inspected in our 2019/20 inspection cycle, primarily covering audits with year-ends between July 2018 and June 2019, required either improvement or significant improvement.” (FRC)
The notion of technological progress is not new for the industry with ever-increasing expectations around the use of digital technology by auditors. Already, many firms automate processes like replacing manually reconciling documents and checking figures. But for the most part, technology is being used to improve already established processes rather than to transform them. The industry needs to move away from relying on the same outdated, laborious and time-consuming practices to analyse twenty-first-century volumes of data and satisfy growing pressure from clients. Essentially, auditors are not yet using technology as a way to enhance decision-making, but more as the next step up from a pen and paper. This is where Engine B comes into play. Engine B’s audit technologies deliver a unique opportunity for audit firms to truly transform these systematic, inefficient practices and vastly improve the consistency of their audits.
Engine B’s Audit Common Data Model (CDM) and Knowledge Graphs provide a solution that enables always-on, context-driven audit for the first time. Among the many benefits, leveraging the Common Data Model for audit eliminates the need for firms to extract and map data over and over again. Instead, the model provides a base layer of quality data (both structured and unstructured data) presented in a standardised format that the auditor can then easily interrogate and analyse.
Sitting on top of the CDM are Engine B’s Audit Knowledge Graphs. Audit Knowledge Graphs uncover links and relationships in the data and provide the much needed context to make more informed decisions, faster. Knowledge Graphs can also discover hidden anomalies in data that may have gone unnoticed to the human eye meaning the auditor is able to make more informed decisions. Leveraging these technologies means that the auditor is presented with a far more comprehensive view of the data, potential fraudulent activity is detected and audit quality is improved.
FRC Audit Review: Audit market health and resilience
“The Big Four firms dominate the FTSE 350 audit market.” (FRC)
It’s universally acknowledged that healthy competition encourages good customer service, fair pricing and better-quality products. But this isn’t the case for the audit sector. The Big Four typically compete to provide audit services to the largest organisations and use their market power to dictate terms to existing or prospective clients. The domination of these main players is not only hindering audit quality but leaving the sector vulnerable to the potential failure of one of these Big Four companies. Though the Competition and Markets Authority’s (CMA) 2019 report highlighted this issue in detail and provided clear recommendations, technology must play an important role in levelling the playing field.
One of the main barriers to entry for challenger firms is that they cannot always afford expensive data extraction solutions or large, internal data teams which subsequently increases the relative capacity of the leading firms. Engine B’s Audit Common Data Model alleviates this problem as it is both open-source and available to all and eliminates the need for smaller audit firms to invest in costly data extraction tools. Utilising the Common Data Model means firms are not locked into one ecosystem either, so leveraging tools from other firms or technology houses is still possible. For example, our Common Data Model works with Microsoft’s Power BI and Power Apps which are both designed to allow firms to build solutions in low or no-code environments. These technologies encourage openness within the sector, increase competition and is a huge step forward in improving the overall health of the audit market.
FRC Audit Review: Covid-19
“The Covid-19 pandemic has been a significant shock for the audit profession. At this time of heightened economic frailty, performing high quality audits is fundamentally more crucial, but harder to execute.” (FRC)
It is still unclear if firms will return to the office in the way they once operated and remote working, in some capacity, is likely to continue for the foreseeable. Engine B enables audit teams to gain better access the data they need without having to waste time going back-and-forth with clients about data irregularities, and because of this, the technology makes remote working far more convenient. Our technology helps auditors to pinpoint the areas of risk or error in the data that they need to focus on, which is even more valuable when you cannot physically sit next to your client. With remote working likely to stick around, having access to one, single source of data truth which everyone can use simultaneously is more important than ever.
As we look ahead, financial reporting is going to be significantly affected this year. Many companies are facing going concern risks and most businesses will have to make unprecedented estimates for bad debts, staff redundancies, or new credit. Engine B helps with auditing these risks that have arisen as a result of covid-19. By freeing up auditors away from basic data extraction and reconciliation, Engine B gives auditors more time to delve into these risks and make judgements on them. Engine B’s Audit Knowledge Graphs also make it much quicker to identify missing evidence or where a business might be most vulnerable to error or fraud, and much easier to perform the kind of data analytics which will reveal problems in the financial statements.
Pre-pandemic, the audit industry was already undergoing a significant transformation with a growing number of firms beginning to experiment with new technologies to improve audit quality. But Covid-19 has forced transformation out of necessity and vastly accelerated firms’ digitisation programmes, making solutions like Engine B even more relevant. If performing high quality audits with an even tighter budget is more important than ever before, firms should look to technologies such as the Audit Common Data Model and Knowledge Graphs to make their processes more efficient and make better use of an auditor’s time. What’s more, is that the pandemic has pushed conversations around the future of audit to the forefront, something Engine B is helping to shape.
Interested in being part of the discussion surrounding technology’s role in the future of audit? Join Engine B for our live digital event on 30th March with guest speaker Robert Hodgkinson, Executive Director at the ICAEW. We look forward to seeing you there!