Accountants at some major audit firms recognize that emerging technologies like distributed ledgers and other developments like cloud computing are changing the volume of data at their disposal and the way they examine clients’ financial statements.
Other technologies like big data and data analytics have also been incorporated into audit work in recent years. Many auditors know that the changes are likely to have profound effects on their business going forward. The question is where the changes will lead.
The firms face one challenge in explaining to clients how their businesses have changed because of all the technology tools and how that justifies the fees they charge to clients. Andrew McMaster, chair of the FASB’s Financial Accounting Standards Advisory Council (FASAC), said during a Dec. 14, 2017, meeting at the FASB’s offices that clients have been conditioned for years to pay their fees based on the number of hours the firm worked on the audit. But with technology, and large sums of money audit firms are sinking into new systems, audit firms are under pressure to realize a return on investments that clients do not see.
McMaster said audit firms have missed an opportunity to make this change clearer to clients. He speaks from first-hand experience. Before he became the FASAC’s chair in January 2016, McMaster retired as deputy CEO and vice chairman of a major accounting firm.
For some clients, an explanation about the change to the audit process is much needed.
“If I can prove to you that you can audit something in half of the time or a third of the time, then how can you keep charging the same amount?” asked Daniel Meader, a principal with Trinity Private Equity Group LLC in Southlake, TX. Meader added that he did not mean to accuse audit firms of overcharging. Auditors are investing so much money in new analytical tools that clients naturally want to reap some of the benefit if it means less time is spent on the audit.
The audit firms respond that to look at the issue as a direct cause-and-effect, where fewer hours translates into lower fees, is to miss the point of their investments in new technology.
“We’re in an environment where quality is incredibly important,” said Dave Sullivan, a partner at a major accounting firm. The chief value he sees is the ability “to start looking at larger populations of data within the company and outside the company to provide more assurance that the financial statements are materially correct and free from error.” Firms are moving from a business model that relied on a sample of a client’s transactions and looking at a much larger set of data. They may not be ready to look at all of a client’s transactions, but they are moving to a world where less guesswork involved.
Richard Jones, another partner at a major accounting firm, said the rapid increase in the use of technology is changing how firms approach their audits with more of a focus on the quality of the work.
The rise of new technology tools may also lead to a change in the financial statement information that clients and auditors believe should be emphasized for investors.
“Today the whole audit approach is designed around financial statement level materiality,” said an accounting firm partner, Kimber Bascom. “If you’re talking about much more granular analysis going on, that has the potential to affect the way materiality is evaluated in the audit.”
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