Accounting and auditing: AI triggers once-in-a-century transition

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The accounting and auditing world will embrace web 3.0, machine learning, human-level artificial intelligence, blockchain and quantum computing as 5G gets rolled out. This change which normally happens over eons of time got accelerated during the coronavirus pandemic. Digital transformation is happening at scale everywhere simultaneously, causing data set capture to take the centre stage.

Accounting driven by six capitals and the need to constantly balance inputs and outputs put a premium on compute power and storage size. As organisations transform, so will audit firms. Indeed, they now lead the transformation in many instances. This is the biggest opportunity for the accounting profession to become super relevant. Transformers want to build in speedy, almost online reporting of outcomes and easily visible audit trails. Naturally they want to partner the accounting firms that are capable of doing this.

As converging digital technology adoption and data analysis based on AI/ML become central to the accounting and auditing processes as well as to business models of organisations, audit firms need to deploy multi-dimensional skill sets. Auditors have traditionally been individuals with business backgrounds but, in the future, all auditors will need an increased level of technological understanding.

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Accounting and auditing will need STEM expertise

In addition, audit firms will require more people with significant expertise in STEM subjects (science, technology, engineering and mathematics) to enable them to leverage technology effectively for audit purposes. Not all these specialists will become qualified auditors, but some undoubtedly will, and their arrival will increase the diversity of audit teams.

Currently, there are 2 major influences that will dramatically change the accounting and auditing landscape.

  • A powerful, always available internet that connects people through search, analysis, collaboration, interactivity, value transfer and access to data for all times and to all who need it.
  • The other parallel line is the block chain which will enable people to move from entity-based accounting to ecosystem-based accounting. This can be explained via a simple example. The debtors and creditors don’t need to both maintain opposite sides of the ledger nor do the banker and account holder need to maintain two sides of the ledger. There will be one common ledger which will be available online backed by state-of-the-art encryption and data protection. This will play the role of facilitating immutable, trustworthy, always reliable and safe transactions in a blockchain.

These influences will transform the quality of financial reporting and it will change the role of auditors in the current space. Auditors will then have to make sure that the interactions within the ecosystem are stable, protected, encrypted and totally in line with the highest standards of data safety and trust.

The whole idea of Zero Trust Security will have to be ensured by auditors. Zero Trust Security is an IT security model that requires strict identity verification for every person and device trying to access resources on a private network, regardless of whether they are sitting within or outside of the network perimeter. Zero Trust is a holistic approach to network security that incorporates several different principles and technologies.

Simply put, traditional IT network security trusts anyone and anything inside the network. A Zero Trust architecture trusts no one and nothing. Zero Trust removes all implicit trust and continuously validates every stage of a digital interaction. To evolve an entity into a true Zero Trust Enterprise, policies and controls must apply across users, applications and infrastructure to reduce risk and complexity while achieving enterprise resilience. Such a security programmer will become a standard that will be the core of internal control systems in a much more enhanced and blockchained manner.

The other inevitable trend is quantum computing. Quantum computers will enable us to do is four-dimensional comparison of data:

  • With their best past internal performance;
  • With everybody else in the competitive world;
  • With past trends; and
  • With the budget.

Hence, there are four dimensional comparisons which will become online real-time as a result of quantum computing. These will redefine the role of auditing.

Integration of technology-based accounting and auditing tools allows auditors to focus on critical and high-risk areas. Technology will assist in overhauling the current linear audit approach of – planning, conducting a risk assessment, performing internal controls testing, and performing tests of details and/or substantive analytical procedures. Technology will enable auditors to perform concurrent tasks with a continual loop of assessing audit risks and enabling an agile audit process to respond to these risks effectively and efficiently.

Further, the integration of the audit methodology with structured and unstructured data analytics illuminates the needle in the haystack. Technology has the capacity to test large volumes of data to ultimately draw attention to the particulars that we cannot see with the proverbial naked eye. It can point out historical and predictive data patterns and data anomalies that may indicate possible fraud, risk of material misstatement, incomplete or inaccurate data, or missing or ineffective internal controls.

As the saying goes, we don’t know what we don’t know. These advanced analytics capabilities could help expose transactional interrelationships between accounts that do not characteristically align and highlight unusual fraudulent data patterns.

Taking into consideration all the above factors, auditing will become a purely robotic process-driven activity. Then the judgement of the auditors will be required to choose the right comparators to make sense from the patterns that emerge and to make an evaluation of how things can be continuingly improved.

Lastly, the rate of adoption of these new techniques of accounting and auditing will be fairly different across the entire ecosystem. So, one of the tasks of the profession will be to enable the acceptance and implementation of these technologies widely. It will be the responsibility of the Institute and the practising Chartered accountants to work together to adopt the path of continuous unlearning and learning.

Shailesh Haribhakti is a Chartered and Cost Accountant, an internal auditor and a certified financial planner. He is a board chairman, audit committee chair and independent director at some of the country's most preeminent organisations. He is a thought leader on the Indian economy and public policy.