Technology and the Audit of Today and Tomorrow

Welcome to the 2017 PCAOB/AAA Annual Meeting. We are delighted that you are able to join us today. As educators of future accountants and auditors, you play a vital role in furthering the integrity of financial statements and in promoting investor interests. I hope that the information presented at this conference will benefit your current and future research.

Before I continue, I am required to say that the views I express today are my own and do not necessarily reflect the views of the Board or the PCAOB.

In my past statements to you, I have focused on such topics as the expanded auditor's report, the business model of the firms, auditor independence, firm governance and incentives, firm transparency, and the need for diversity in the accounting profession.[1]

This afternoon I would like to spend a few minutes talking about the evolving role of technology in auditing and how this will likely impact the audit of the future.[2] I also would like to discuss the demands this evolution is likely to make upon you as educators. Tomorrow you will participate in a panel discussion on this topic, and I hope my remarks today will serve as a keynote to your discussion.

Emerging Use of Technology in Audits

In January 2016, the Founder and Executive Chairman of the World Economic Forum, Klaus Schwab, said that we are entering a fourth industrial revolution characterized by a range of new technologies that will fundamentally alter the way we live, work, and relate to one another. He notes that we are witnessing technological advances in areas such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, and quantum computing — just to name a few — that could transform every industry in every country.[3]

This perspective has been embraced by the leadership of the major accounting firms as it relates to the use of technology in the conduct of an audit. According to a recent report, the accounting profession spends approximately $3 billion to $5 billion a year on technology and it is now part of the new baseline of operational costs for the major firms.[4]

Deloitte Chief Executive Officer Cathy Engelbert recently stated, "[i]n the next five or six years I think that the accounting and auditing profession will change more than it has in the last 30 [years]."[5]

We are clearly in the midst of a transformational era in auditing.

Impact on the Audit

Every week we see articles or reports concerning the impact of technology on audits.

For example, new technological tools have the potential to enable the auditor to mine and analyze large volumes of structured and unstructured data related to a company's financial information. This capability may allow auditors to test 100 percent of a company's transactions instead of only a sample of the population.

The major accounting firms have asserted that the use of these tools will enhance the audit by automating time-consuming tasks which are more manual and rote in nature. For example, through the use of artificial intelligence, robotic systems could interface with a client's systems to transfer and compile data automatically, something previously done manually by a junior auditor. Other areas where such technologies may introduce efficiencies include processing of confirmation responses or using drones for physical inventory observations.[6]

As a result, the auditor should have more time to carefully examine the more complex and higher risk areas that require increased auditor judgment and contain high levels of estimation uncertainty. Such tools, we are told, will also enable auditors to perform advanced analytics which will provide them with greater awareness and deeper insights into the company's operations. Data analytics may also allow auditors to better track and analyze their client's trends and risks against industry or geographical datasets, allowing them to make more informed decisions and assessments throughout the audit process.

Further, firms assert that through the power of big data, auditors will be able to correlate disparate data information to develop predictive indicators to better identify areas of higher risk, which in turn could lead to early identification of fraud and operational risks. For example, firms we are told have the ability to develop predictive models to forecast financial distress in order to better assess the future financial viability of a company or improve fraud detection by helping auditors assess the risk of fraud as part of their risk assessment.

The use of these technological tools and methods raise certain challenges. For example, it is important that the data being used is reliable, complete and accurate. That is true for general ledger data, other financial and operating data, and data from outside the company. Data security and quality control over these tools, whether developed in-house or by vendors, are also factors for firms to consider. And ensuring consistency of approaches across group audits may become difficult if such tools are not readily available to, or used by, affiliate offices.

Lastly, auditors should take care that they are not over relying on data analytics. As powerful as these tools are, or are expected to become, they nonetheless are not substitutes for the auditor's knowledge, judgment, and exercise of professional skepticism.

Some too are concerned that auditors will use these tools to provide additional insight to management about their operations and processes rather than to improve audit quality and investor protection. This is not surprising as a majority of articles note that through new tools for extracting, compiling, and analyzing big data, the auditor is able to provide meaningful value-added services to management.[7]

I am particularly interested in how these new predictive tools will benefit investors and how much of what the auditor learns from these new tools will be made available to investors in a transparent way so as to enable them to make a more informed investment decision.

Impact on the Relevancy of the Audit

Over the years there has been a growing concern that the audit is perceived as a commodity by many of its users and, as a result, is losing its relevance. There seems to be a general awareness, at least amongst the largest firms, that for the audit to remain relevant it must adapt to the changing needs of investors. For example, James Turley, former Global CEO of Ernst and Young LLP, said in 2012 "[t]he most important issue facing our profession is the relevancy of our audit service [and its] product and making sure that we communicate with stakeholders in ways that are of importance to them."[8]

For these technological tools and methods to help uphold the relevancy and timeliness of the audit, they must be used to develop and deliver a higher quality audit to better serve the interests of investors.

I applaud the profession for seeking to innovate the audit by adding these tools. But it is important that auditors are transparent about the audit and their findings during the audit and that they use their enhanced technological tools to add value to their primary client — namely the investor.

Another potential impact of the technological revolution deals with the question of whether auditors should provide assurance in other areas. Today, investors and others examine a great amount of company information, including information outside of the financial statements, to make investment decisions. Examples of such company information include sustainability reports, environmental, social and corporate governance matters, and non-GAAP financial measures. This raises a question: to what degree is the relevance of the audit a function of the relevance of the information being audited?

I encourage you to continue to research the impact of these developments in technology as they relate to the audit, including (i) how these tools may be leveraged to improve audit quality and protect investors, (ii) how this trend will affect the skillsets required for auditors, and (iii) what impact this will have on the composition and structure of audit teams and the business model of the firms.

I would also encourage you to examine whether this trend creates some form of barrier to entry into certain markets for small firms and, if so, the implications of this development. I would hope, and like to believe, that there is an opportunity for small firms to compete with, and even outperform, the larger firms based on their ability to be more creative using advanced auditing methods, but this remains to be seen and warrants your attention.

Impact on the Future of the Audit

How these advancements will shape the future of the audit is yet to be determined.

Some predict that the audit of the future will be able to provide a greater level of assurance than today's level of "reasonable assurance" as auditors may be able to examine 100 percent of a client's transactions.

Others predict that the ability of the auditor to access client data in a timelier, standardized format, may result in auditors moving towards a more continuous auditing and monitoring approach.

As these tools enable the auditor to amass a wide range of information from the client, they open up the possibility for the expansion of the auditor's assurance beyond the financial statements, including, to name a few, cybersecurity and sustainability reporting.

A large percentage of investors welcome extending the scope of the audit or assurance provided by auditors. However, before such additional assurance is advanced, I believe the impact of these new tools and methods on the quality of the audit must be thoroughly examined.

There are other technological developments worth noting due to their potential impact on the audit. Blockchain is one that comes to mind. Blockchain is an open, distributed ledger where transactions are recorded and verified by the parties involved. The verification of the transaction by parties purportedly assures the integrity of the financial records, and, some believe, may reduce or even eliminate the need for audits in the future.[9]

Will new, differentiated types of reporting and new assurance offerings ensure that the audit remains relevant to users? Will new technologies, such as Blockchain, call into question the need for an audit? I think these are questions that warrant your further examination.

Lastly, the increased automation and use of artificial intelligence in audits may mean that firms will look to hire fewer junior auditors who previously performed the manual tasks now automated.[10] For example, a top executive at a Big Four firm in the United Kingdom, stated in a recent report that the hiring of "auditors and accountants could fall by as much as 50% by 2020 due to the impact of artificial intelligence."[11] Rather, the accounting firms will be competing with technology companies such as Apple, Facebook, and Google for individuals to design algorithms.[12]

Time and again we hear that the challenges facing the future of the audit will come from the Googles of the world and the technological innovators in Silicon Valley which may eventually make the offerings of the firms of today less relevant. Or, alternatively, make the creative and adaptive firms more relevant instead of less.

I hope you will analyze whether this concern is real or not, and if it is, why.

Tasks for Educators

Finally, it is important for current accounting students — the future auditors — to be knowledgeable about this evolving world of technology. Firms are looking to hire top talents who have abilities in science, technology, engineering, and mathematics along with the ability to work with large quantities of data and possess strong analytical skills.

It is up to you as educators to continue to teach these skills to your students to prepare them to enter a rapidly changing audit environment.

I look forward to your continuing to analyze the future role and relevance of the audit and how best to prepare our next generation of auditors for the audit that awaits them.

Thank you.

[1] See e.g., Steven B. Harris, Issues for the Academic Community to Consider, 2016 PCAOB/AAA Annual Meeting, April 15, 2016, Steven B. Harris, Issues for the Academic Community to Consider, 2015 PCAOB/AAA Annual Meeting, April 16, 2015, Steven B. Harris, Concerns of Investors, 2014 PCAOB/AAA Annual Meeting, April 25, 2014, and Steven B. Harris, Recent Activities of the Investor Working Group and the Investor Advisory Group, 2013 PCAOB/AAA Annual Meeting, April 25, 2013.

[2] As indicated in the March 31, 2017 Standard Setting Update, changes in the use of data and technology in the conduct of audits is a topic on the PCAOB's research agenda.

[4] See Hood, Daniel, Accounting Today: Melancon: CPA firms will be unrecognizable in 5-10 years, (Feb. 13, 2017) at

[5] Cohn, Michael, Accounting Today: Deloitte Leverages AI and Analytics for Audits, (Nov. 14, 2016) at

[6] Lewczyk, Megan, Going Concern blog: Automation to Artificial Intelligence: New Frontiers for Auditors, (April 21, 2016).

[7] See e.g., Hood, Daniel, Accounting today: Looking on the Brighter Side: The profession's leaders share why its best days may lie ahead of it, (Sept. 29, 2016) and Accounting Today: The Audit of the Future – Virtual Roundtable, (Aug. 29, 2016) at

[8] See Accounting Today: Top 100 Extra: The Biggest Issues Facing the Profession, (Sept. 1, 2012) at

[9] See Baron, Jon "Blockchain, accounting and audit: What accountants need to know," Accounting Today (March 27, 2017).

[10] See Monga, Vipal, "Need an Accountant? Try a Robot Instead," Wall Street Journal (March 7, 2017).

[11] Wiliam-Grut, Oscar, "AI could destroy hiring in one of the biggest industries for graduates," Business Insider (May 10, 2016).

[12] See Id.