The role of audit in the financial system – and in society – is based on trust. Will technology change the relationship between company, auditor and stakeholder in any way? If so – how?
Though the role of the auditor is evolving, the key function remains unchanged: reporting to various stakeholders, comprising investors, employees and society as a whole. However, many stakeholders are looking to audits to offer a different perspective – something more than just verified financial data from the recent past.
The world is changing, but financial statements still need to give a true and fair view. When a balance sheet is drawn up on 31 December and the audit team starts working in January or February, to present their findings in May or June – this is very late. Management, the markets, stakeholders, all want the results of the audit as fast as possible. For decision-making, six months is far too long. If you’re an investor and you’re looking at a particular company, you want to understand how it looks today, not how it looked six months ago. Employees also want to know how their company’s doing, and not just financially.
Two factors have sped up the process. The first is Covid-19, which has accelerated many trends that were happening already which affect how fast can you close an audit. Number two is automation, AI, data intelligence. Expectations of faster audits will not disappear. We’re doing things faster and better, which impacts the way we analyse business performance. When you carry out an audit of a multinational corporation, the work is very complex. You’re looking at many subsidiaries, which are issuing billions of invoices. If you’re working on a sample of, say, 100 invoices, trying to make a judgment based on that, from the business-value perspective that’s not so useful. However, if we use robots to scrutinise one billion invoices, we can analyse huge amounts of data, and we no longer have to employ an army of consultants to look at paper.
Robots that can scan huge volumes of records, looking for descriptions, mistakes, notes from management meetings, receivables, working capital, valuations and stock management – not just peeking at a tiny sample, but using a complete population-based approach which can be more or less complex, and using the same methodology every time. Artificial intelligence and machine learning will over time make the process more and more accurate with each successive audit.
Is the customer always right?
When a management board signs an agreement with its auditors, it is bound to accept the results, whether it likes them or not. The auditors report to both the management board and the supervisory board – again, whether the management board likes it or not. Social trust is at stake here – we cannot put our brand at risk. What the management board might expect and what it gets are not always the same thing. I feel safe about this equation; if a client is pushing us for solutions that we can’t sign off on, we have a safety net. The markets are regulated. If we are pushed by a management board, I can report this pressure to the supervisory board or to the financial regulators. There are tools to help us, but frankly you just don’t feel this pressure. That demonstrates the maturity of Poland’s capital markets. In less-developed markets, yes, there are instances of that kind of behaviour, of auditors being expected by both boards to sign off on an inaccurate financial statement. In our part of the world, however, this is thankfully very rare.
It is essential that all the stakeholders involved trust the auditors. If any group of stakeholders is expecting to see a better result from the financial statements, our role is to say this isn’t possible. Working with supervisory boards is helpful, because they form an additional layer – we can discuss matters with them openly. Their independence is important; they need to be able to challenge the auditors – and the management board.
Every now and then, society’s faith in the auditing profession is rocked by a scandal. How is trust rebuilt in the aftermath of such events?
Auditing scandals, such as those seen at Enron, or ones closer to home, are bad for the whole profession. They occur on various scales and across various geographies – and we will have them in the future, for sure. There are two things to bear in mind: first, we are constantly on the lookout for fraudulent activities. Fraud is something intentional. We’ll never be able to discover 100% of fraud cases; fraud is designed to be hidden within an organisation, and if management boards are determined to hide something from their auditors, some of them will succeed. But such activities are becoming more and more visible, thanks to tools to detect fraud more easily – tools we didn’t have 20 years ago.
There are steps that we as auditors can take to minimise the impact of these cases, but scale is something that doesn’t help. Take the case of Wirecard in Germany, for example. It’s not for me to judge, or to cast doubt on our competitors, but the impact of management or the auditor on all accounting firms and capital markets is difficult to tackle; trust is at risk and on a very big scale.
Regulators are making compliance a big issue for any company. Audits have to span a wider range of subjects, from diversity to sustainability – are we not straying too far from the financial basics of the auditing profession?
I love the concept of ESG. It gives a more balanced picture, it’s fantastic – I’m so supportive. It might not be close to the heart of traditional auditors who focus on the numbers, but for me, I’d like to invest in companies that can deliver profits in an ESG-friendly way. The financial data is augmented by additional documents, management representations, communications to the market. With regulations coming from all over the world, ESG audits will become mandatory – first for public companies, and then the demand will spread to private companies. They should be required to do the same thing: to present their values as well as what’s important for stakeholders and the markets. There is a widespread understanding of the concept of ESG audits from both sides; companies do it because it’s good for them, for society and for financial markets.
There are two perspectives. On the company side, ESG shows that an organisation is in line with current environmental, social and governance expectations. And so they come to advisors, asking them to devise new KPIs for management. The auditors who verify this information will be looking at this in a completely different way from the methodologies they use to scrutinise financial samples or receivables. With ESG there is need for fine judgment – human judgment. People often assume that with all this AI, you won’t need people to do audits, that everything will be done by robots, that all the data will be in the cloud. In 20, 30 years’ time – will there still be a need for auditors? My answer is that whilst AI will be able to prepare good-quality audits based on real-time financial statements with the touch of a button, you’ll always need people to exercise judgment. ESG statements are a field where the human mind will always be necessary to understand the story. The full automation of the audit profession by robots is still a very long way in the future.
We do need to avoid conflicts of interest. So we can’t audit anyone we advise, nor can we audit anyone that our accountants prepare the books for.
How do you see the future of audit?
If full robotisation is still some way off, real-time auditing is something we can look forward to in the nearer term. For management, the ability to guide the company for what lies ahead – not for what is already in the past – is crucial. The future will be cloud-based, big data – and putting AI to work on it.
Look at the speed of change. Things are changing much faster than they were 20 years ago, and that will accelerate still further. Traditionally, a typical audit reflected a company’s situation from six months ago. The books are finished at the end of the year, then it took a couple of months to prepare the financial statement, and another couple of weeks to review it. It’s much faster today, with companies moving with the real-time trend, extracting the data much faster. With access to financial data at the touch of a button, the gap from the balance-sheet date to the audit being signed off is now between two and four months, and I’d expect that in 10 years, it will be down to one or two months maximum.
Without audits, there’s no other way to verify financial data. Are the numbers alone enough? Let’s say I want to buy stock next week. I need to know whether the financial data on which I base that investment decision are reliable or not. But I also want to know how well the company I’m investing in will be performing 10-15 years from now. I want to look at historical data, of course, but I also want a real-time assessment of how the company is doing now, and I want to look at and understand its ESG stance. There’s also a need for auditing prospective data – the client wants to look ahead. How will the company be performing six months, a year from today? Sure, I can hear it from management, but only an auditor can verify how a company operates. Here, AI can point to trends in the sector. The management might well say that revenue will go up 100%, but the auditor, armed with real-time information from across the sector, can say with authority that it’s more likely to go up by 50%. I can share this information with the wider market. Given any investment at a particular point in time, the data on which that decision will be made – the valuations, future cashflows, management assumptions, future discounted value and projections – will become far more meaningful as we move toward real-time auditing.
Piotr Wyszogrodzki is a managing partner of PwC Polska’s Audit Department. He has over 20 years of professional experience in finance, auditing and accounting. Piotr is a qualified Chartered Certified Accountant in Great Britain (ACCA) and in Poland (PIBR). He specialises in auditing financial statements of Polish companies, in particular private enterprises. In his professional career, he was also responsible for the financial analysis of a number of companies listed on the Warsaw Stock Exchange, as well as international corporations operating on the Polish market. From 2012 he was responsible for PwC's services for private companies in Poland and the Central and Eastern Europe, and from 2016 to 2019 for the entire European Region. In 2018-2020, he coordinated PwC's global activities in the area of start-ups/scale-ups.