Rapid developments in digital technology and new rules around bidding for auditing work have forced accounting firms to focus on winning business and to keep up with the competition, the big four auditors (KPMG, Deloitte Touche Tohmatsu, PricewaterhouseCoopers and Ernst & Young) are investing in data analytics technology, the FT reports.
The news that auditors are changing their approach comes at a time when more large contracts are becoming available since the EU Audit Reform came into effect in April last year and only last month Barclays ended their 120-year relationship with PWC and hired KPMG as auditor. Other changes in auditor relationships include, HSBC which moved its business to KPMG after 17 years with PwC and Royal Bank of Scotland which ended a 14 year relationship with Deloitte, to appoint Ernst & Young instead.
Reports suggest that there have been a surge in audit tenders since the reform which states that EU companies have to rotate their auditors every ten years, with the option of tendering a mandate after ten years and re-appointing the same firm for an additional ten years.
By law, company auditors have to give an independent opinion of a company’s financial statements, however, according to industry experts, in practice auditor independence can be compromised when a long-standing relationship leads to fee dependency and relationships with management get too familiar, which can reduce professional scepticism - a key attribute for an effective audit.
After the profession was criticised for being complacent about the role it played in the 2007-2008 financial crisis and many companies involved in scandals received clean audits, the UK Accountancy watchdog has also urged auditors to improve their innovation and adopt more of a sceptical approach.
According to the FT, instead of relying on restricted samples of data like they have in the past, auditors are beginning to transform the way they collect, analyse and test entire data sets. Last year, KPMG signed a data analytics deal with McLaren and Tony Cates, UK head of audit at KPMG told the FT that audit tendering has made the company become more innovative.
Although testing and storing large quantities of data can be valuable, there are also concerns around cyber attacks and data breaches and according to a KPMG report on audit committee trends, KPMG's analysis of the FTSE350 Cyber Governance Health Check shows that cyber security has become an huge issue in the last few years and will continue to grow. “88% of participants include cyber in their "Risk Register" and 58% expect cyber risk to increase over the next year as corporations’ networks and systems continue to be subject to hacking and attack,” the report states.
However, many audit committees are diversifying to deal with these new challenges. “They’re bringing in specialists in areas only peripherally connected to finance, such as social media and cyber security – or in specific risk areas associated with their industry – so they can handle new challenges while still focusing on financials, reporting and controls,” the report states.
According to the FT, auditors have said that being able to monitor large volumes of data enables them to hone in on potential problems and also frees up individual auditors to focus on these problems. “Testing whole populations as opposed to samples in effect allows us to drain the lake to find the treasure,” Gary Rapsey, PwC’s global assurance transformation lender told the FT.
The FT reports that technology is reshaping the way audit firms do business in the following ways:
- The analysis of entire sets of expense claims, rather than a sample, can highlight abnormalities.
- Analysing whole sets of journals lets auditors test for Benford’s Law and can highlight anomalies such as entries posted at unusual times.
- Technology developments are widening the scope of audit functions outside of company accounts, to areas such as food safety due to reported rises in the number of people affected by food poisoning every year. PwC has developed a data analytics software application called Halo, which advises retailers about the freshness of a food item and whether it may be hazardous to a person’s health.
- Auditors are able to trawl the unstructured data left by companies and individuals on social media and email to uncover potential suspicious behaviour. Some firms are developing programs to analyse the relationship between different data sets with the ability to scan through voicemails and emails with emotion-detection software.