Accounting Innovations Are Changing Auditing

Major accounting innovations will soon change the way auditors work. Donny Shimamoto, CPA, CITP, CGMA described accounting innovations during an Audit Talks podcast. As the Managing Director of IntrapriseTechKnowlogies LLC, Shimamoto deeply understands accounting technology. Indeed, his firm exclusively focuses on IT advisory services that support accounting and auditing firms.

During the podcast, Shimamoto explained how several accounting innovations will shape the future of auditing. Specifically, he thinks:

  • If auditors can access the full volume of client data, that will enhance audits.
  • Blockchain will help auditors gain access to data between multiple parties.
  • Validation of blockchain transactions might create an additional opportunity for auditors.
  • Audits will initially incorporate two forms of artificial intelligence.
  • Accounting firms should begin training now for two new roles related to innovation.

Let’s explore each of these points in a little more detail. For the complete picture of accounting innovations, please listen to the podcast.

Future audits will examine more data

Modern organizations collect a wealth of information in every corner of the business. Therefore, creative auditors with the right technology will be able to review more data. For example, if you are auditing a sales organization, what additional data exists beyond invoices and receipts? To start with, does the company have a CRM system or sales automation software? Further, could the auditor gain access to records of outbound sales contacts and emails from customers? Additional sources of contextual data could enhance audit quality. However, the challenge for auditors will be getting access to more data.

Blockchain provides transparency and access

Blockchain may hold the answer for gaining access to more data. Shimamato said, “with blockchain, the transparency and ease of access to data between multiple parties is going to help fuel our access to some of this data.”

Within a blockchain, a record exists of every stage of a transaction through a supply chain. Consider the farm-to-table supply chain. It starts with a farmer growing vegetables. Next, produce is graded and a buyer purchases it for a distributor. Then, a trucking company transports the vegetables to another town or state. Finally, it is stocked in a local food market and then sold to the end consumer. That supply chain included many handoffs and transactions between multiple parties. And it was all captured by a blockchain.

As you can see, this level of visibility would be invaluable to auditors. Basically, blockchain will establish a source of truth and transparency for audits. Specifically, blockchain makes it easier to track data through multiple transactions in sales, depreciation, and accounts payable.

A new opportunity for audit firms

Blockchain could present an additional auditing opportunity for firms. Because of the involvement of third parties in transactions, focus on risk and controls is needed. Without a doubt, fraud could be injected into a blockchain. Accordingly, there is a service opportunity for firms to audit the security and integrity of the blockchain itself.

AI for audits: Natural language processing

Artificial intelligence, or AI, is not one monolithic thing, it is a collection of technologies. Someday, there may be many ways that AI enhances audits. But, right now, Shimamato sees two types of AI with audit applications: natural language processing and machine learning.

Natural language processing (NLP) can read and understand tremendous volumes of information. For example, NLP can “read” dozens of contracts in a fraction of the time an auditor would require. Further, it can understand the different clauses contained and map those clauses back to standard terms and conditions. For instance, NLP could help auditors determine lease classifications for the new revenue recognition standards.

Another example involves contract performance criteria. Rather than auditors reading thousands of pages, AI scans documents to identify important areas for auditor review. Then, it can extract and validate key information.

AI for audits: Machine learning

Machine learning involves giving a computer an algorithm that allows it to learn without explicit programming. Basically, the algorithm helps it recognize patterns in existing data. Then, the AI learns to predict similar patterns in new data. For example, in audits, machine learning can identify correlations between data. Then, it can use that knowledge to identify exceptions or anomalies.

In general, Shimamato likes machine learning for its ability to conduct a 100% audit. “I’m going to grab all of the data that I can. I’m going to analyze all of it. And then using different risk indicators, I may start to focus on exceptions and anomalies,” he said. Additionally, machine learning should help streamline the audit process.

Accounting innovations will drive two new roles

The combination of blockchain and AI will move the profession towards a more continuous form of auditing. Furthermore, firms will need to deeply understand the technology to leverage accounting innovations. Thus, Shimamato advises firms to start now in upskilling staff for two future roles.

  • Business Analyst: This role involves understanding accounting information systems and processes. Therefore, you will need to be able to identify how information flows across multiple business systems. Additionally, business analysts will understand application layer controls and data analytics.
  • Data Scientist: This role will deal with how big data, analytics, and machine learning intersect. You will need to understand how AI and analytics operate on data in order to design algorithms. Further, data scientists help firms understand the story behind data—what it says and what it does not say.

Forward-thinking firms are already exploring the potential roles of blockchain and AI. Wolters Kluwer remains committed to delivering these advances in ways that are easy for firms to adopt and use.

Listen to the podcast for more insights about accounting innovations for audits.

Subscribe to Wolters Kluwer’s Audit Talks on Apple, Google, Soundcloud, or Spotify.

AUTHOR

Cathy Rowe

All stories by: Cathy Rowe